Sell Bharat Heavy Electricals Ltd For Target Rs.43 - ICICI Securities
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Growth over a low base, variable cost pressure continue
Bharat Heavy Electricals (BHEL) incurred EBIDTA loss of Rs2.9bn, in Q2FY22 despite revenue rise of 38% YoY, as raw material cost proportion increased 160 bps YoY to 66% on increase in commodity prices. However, 34% YoY decrease in other expenditure due to focus on cost reduction and net provision withdrawal of Rs1.8bn arrested margin decline. Receivables fell 11% YoY to Rs311bn led by 22% reduction from state sector to Rs131bn. Order intake and outlook remain muted while the current orderbook stands at Rs1.1trn. Factoring in an improving execution outlook, we raise FY22E and FY23E earnings by 13% each. 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 revised target price of Rs43 (previously: Rs38).
* Healthy execution; margins hit by commodity prices: Healthy 38% YoY growth in revenue over a low base indicates recovery; however, it was below expectations. High raw material cost proportion at 66% and fixed overheads, kept overall cost pressures elevated. The company has taken a net provision write-back of Rs1.8bn during Q2FY22, limiting EBIDTA loss to Rs2.9bn.
* Some order wins, but outlook remains muted: The current orderbook stands at Rs1.1trn (5.6x TTM sales). During the quarter, the company won the NPCIL turbine package of 6x 700MW amounting to Rs108bn. The NTPC Talcher order for 2x 660MW got cancelled, while the company is L1 in steam generators for 12x 700MW nuclear power plants. Finalisation of the thermal power plant order is getting delayed impacting overall visibility.
* Reduction in receivables supports cashflow: Debtors reduced by Rs4.2bn from Mar’21 levels and overall debtors stood at Rs311bn. There has been 22% YoY drop in receivables from state utilities to Rs131bn, while that from central utilities declined 6% YoY to Rs112bn.
* Maintain SELL: Macro challenges in thermal power persist and may further impact execution and revenue growth prospects. Order intake outlook for H2FY22E remains weak. High receivables at Rs311bn, growth and margin stress may impact RoCE. Absence of any meaningful alternative to thermal power is likely to weigh on overall performance in medium to long term. Hence, we maintain SELL on the stock. We keep our valuation multiple unchanged at 15x FY23E earnings with revised target price of Rs43 (earlier: Rs38).
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