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Weak quarter; strong inflows provide visibility

Quick Pointers:

     Poor sales growth (+1.7% YoY) and margin decline (-760bps YoY) in Power segment drives weak quarterly performance.

    9MFY24 order inflows came in at Rs360.5bn (vs Rs152.3bn in 9MFY23) with additional orders worth ~Rs205bn booked till date in Q4.

BHEL reported 4.6% YoY revenue growth to Rs55.0bn with EBITDA margin coming in at -1.1% in Q3FY24 vs +2.7% in Q3FY23. Rapidly growing demand for electricity has led to revival in thermal power ordering, with the government planning to add 55-60GW coal-based power capacity by 2032, thereby creating a healthy pipeline for BHEL who is the dominant leader in the space. Opportunities are also developing in areas such as defence, railways, coal gasification, green hydrogen, nuclear & hydro energy on account of favorable government policies promoting infrastructure development and energy transition, which can boost the company’s non-coal business prospects.

We believe 1) pickup in thermal power orders, 2) diversification into segments such as railways, defence, nuclear, green hydrogen, coal gasification, etc., and 3) growing spares & services business augurs well for company in the long-term. However, execution pace, material costs, operational efficiency and working capital management will be key monitorables. The stock is trading at a P/E of 60.1x/22.5x FY25/26E. We roll forward to FY26E and re-assign ‘Reduce’ rating with a TP of Rs200 valuing it at a P/E of 20x FY26E, factoring in robust order intake this year and healthy pipeline going forward, which improves long-term visibility.

Subdued result led by weak performance in Power segment: Standalone revenue rose 4.6% YoY to Rs55.0bn (PLe: Rs59.5bn) driven by strong growth in Industry segment (up 28.0% YoY to Rs12.1bn). Power segment sales were up 1.7% YoY to Rs40.6bn. Gross margin declined by 388bps YoY to 28.4% (PLe: 30.5%) due to weaker mix. EBITDA loss came in at Rs629mn vs +Rs1.4bn in Q3FY23 (PLe: +Rs291mn). EBITDA margin fell by 388bps YoY to -1.1% (PLe: +0.5%) led by the gross margin contraction. Power margin fell sharply to 3.5% (vs 11.1% in Q3FY23), while Industry margin improved to -0.3% (vs -7.7% in Q3FY23). Net loss stood at Rs1.6bn vs PAT of Rs310mn in Q3FY23 (PLe: Rs644mn loss), driven by weak operating performance and higher interest costs (up 36.2% YoY to Rs1.9bn).

Order book stands at ~Rs1.1trn: Order inflows in 9MFY24 came in at Rs360.5bn (vs Rs152.3bn in 9MFY23), driven by expansion in core sectors of the economy along with demand for defence products. Order book stands at ~Rs1.1trn (4.8x TTM revenue) comprising of Power (70%), Industry (26%) and Exports (4%). Key orders bagged in 9MFY24 include 1) Supply of propulsion systems for 80 Vande Bharat trains in consortium with Titagarh, 2) Package for 12x240MW Electro-Mechanical Works of Dibang 2,880MW hydropower project from NHPC, and 3) Setting up 2x800MW Supercritical Thermal Power Project Stage-II at Lara from NTPC.

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