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Cost pressures hit margins; order outlook weak

Bharat Heavy Electricals (BHEL) incurred EBIDTA loss of Rs4.7bn despite revenue rise of 47% YoY due to lower than expected growth in execution and increase in commodity prices. Receivables fell 11% YoY to Rs309bn led by 33% reduction from state sector to Rs133bn. Order intake and outlook remain muted while the current orderbook stands at Rs1trn.

Factoring-in deferred tax, we raise FY22E earnings by 12% despite sharp 92% cut in EBIDTA, while we trim FY23E earnings by 4%. Given the macro challenges, weak balance sheet and uncertainty regarding strategic initiatives that can meaningfully substitute thermal power equipment, we maintain SELL on the stock with a revised target price of Rs38 (previously: Rs40).

* Healthy execution; margins hit by commodity prices: Healthy 47% YoY growth over low base indicates recovery, however, its below expectations. However, high raw material cost proportion at 67% and fixed overheads, kept overall cost pressures elevated. Company has taken a net provision write-back of Rs1.8bn during Q1FY22 limiting EBIDTA loss to Rs4.7bn.

* Delay in order finalisation indicates lack of urgency at client-end: The current orderbook stands at Rs1trn (5.8x TTM sales). Company is L1 in NPCIL turbine package of 6x 700MW amounting to Rs108bn, NTPC Talcher order for 2x 660MW, and steam generators for 12x 700MW nuclear power plants. Finalisation of the thermal power plant order is getting delayed impacting overall visibility.

* Reduction in state utility receivables supports cashflow: Debtors reduced only by Rs4bn from Mar’21 levels and overall debtors stood at Rs309bn. There has been 33% YoY drop in receivables from state utilities to Rs133bn, while that from Central utilities declined 6% YoY to Rs108bn.

* Maintain SELL: Macro challenges in thermal power persist and may further impact execution and revenue growth prospects. Order intake outlook is weak and most order finalisations are getting delayed. High receivables at Rs309bn, and growth and margin stress may impact RoCE. Absence of any meaningful alternative to thermal power is likely to weigh on overall performance in the medium to long term, hence we maintain SELL on the stock.

We keep our valuation multiple unchanged at 15x FY23E earnings with a revised target price of Rs38 (earlier: Rs40). Company is looking to diversify into hydrogen systems and electrolytes for fuel cells, solar batteries, oil & gas, defence, etc. It has also created a separate group to work on new opportunities in these areas. We will however wait to see more ground actions and concrete plans on the same.

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