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Revenue disappoints once again, operating losses continue

Receivables remain elevated; recovery not in sight

* BHEL’s 3QFY21 earnings were disappointing as revenue came in 21% below our estimate. Higher fixed cost dented operating performance, with operating level loss attributable to under-absorption of costs. The company is yet to show any significant improvement in pending receivables, with total debtors at INR348b in 9MFY21 (v/s ~INR365b at the end of FY20 and INR349b in 1HFY21). In spite of the management’s ongoing efforts, we expect receivables to remain elevated in the near future. Order inflows remained weak, with 35%/47% YoY decline in 3Q/9MFY21.

* We increase our estimated losses for FY21E and cut our FY22E/FY23E EPS estimates by 9%/15%. While orders are few and far between, the pricing environment remains highly competitive, limiting scope for margin expansion. On its ongoing diversification strategy, the company is favorably placed as an L-1 bidder in a sulfur recovery unit (SRU) for IOCL Panipat and is restructuring its solar business division. Any material financial impact is still a long time away. We maintain our Sell rating, with a TP of INR26/share (14x FY23E EPS).

Order inflows remain weak

* 3QFY21 earnings summary: Revenue stood at INR44.5, down 22% YoY (21% below our estimate). Gross margin declined 270bp YoY to 33.9%. Operating loss stood at INR1.8b (v/s an operating profit of INR3.3b YoY). Employee cost stood at INR13.8b, flat YoY and formed 31% of sales. Bottomline losses stood at INR2.3b (v/s our estimate of INR300m loss).

* Segmental highlights: a) Power: 3QFY21 revenue came in at INR30b, down 27% YoY. EBIT margin stood at 3.8% (v/s 10.6% YoY). b) Industry: 3QFY21 revenue declined 12% YoY to INR12.2b. EBIT losses came in at INR1.2b (v/s a profit of INR800m YoY).

* Order book (OB) stood flat YoY at INR1,067b, with OB-to-revenue ratio at 7x. Segment-wise OB is as follows: Power – INR863b, Industry – INR131b, and International orders – INR73b.

* Order inflows stood ~INR39b in 3QFY21 (Power – INR23.4b, Industry – INR14.7b, and international orders – INR750m).

Highlights from the management commentary

* Around 80% orders in the total order book of INR1,067b are executable.

* BHEL is favorably placed in: a) 2*660MW NTPC Talcher main plant package, b) 2*660MW TANGEDCO Udangudi Boiler modification package, c) fleet mode procurement of 12 steam generators and d) a number of FGD, boiler modifications, and emission control orders.

* Tendering is underway for 6*700 MW NPCIL, 2*800 MW NTPC Singrauli, 2*800 MW NTPC Lara, and 2*660 MW Pench. All tenders are on an EPC basis. Tenders for ~30GW of FGD orders are in various stages of processing, with a similar quantum of new tenders to be issued in upcoming quarters.

* Of the total receivables, 12% are from the private sector, 47% from state entities, 34% from the Center, and 7% from exports.

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