BHEL

Source: The Hitavada      Date: 05 Mar 2017 09:26:57


TOP takeaways from 3QFY17: Recurring PAT (Rs 946mn vs. loss yoy) was 49% below our estimates, but 24% above consensus; Lower-than-expected margins, lower other income, and higher interest costs led to the disappointment; EBITDA (Rs 2.2bn vs. loss yoy) was 26% below our estimates (above consensus), as margins of 3.5% came in 150bps below our estimates (consensus: 1.2%); Order inflows remained weak (Rs 16bn; -73% yoy), as order placement remained delayed, despite BHEL being the lowest bidder for 5.2GW of projects; Gross collectible receivables stood at Rs 213bn, of which those greater than a year were Rs 60bn; Net receivables marginally declined to Rs 352bn from Rs 356bn in 2QFY17.


Outlook and Valuation: Share of slow-moving orders in BHEL’s orderbook is expected to reduce to 18% over the next 12 months from 44% currently, as two Telangana projects receive requisite clearances along with new order flow from Bangladesh (Rs 100bn), Tamil Nadu (Rs 60bn), and the Telangana lift irrigation scheme (Rs 25bn), thus increasing visibility on our FY18 revenue estimates. This, coupled with a low tax rate assumption, leads to an 8% increase in our FY18 earnings while we cut our FY17 estimates by 4%. Our estimates build in 560bps margin expansion over FY17-19 coupled with improving working capital. Despite this, we find it difficult to justify current valuations (17x FY18 PE) for single-digit RoEs and no material business diversification.


As a result, we upgrade our rating on BHEL only one notch to Neutral from Sell and raise our target to Rs 135 (from Rs 120 earlier) as we roll forward our valuation to September 2018 (March 2018 earlier) based on 15xPE.
Key things to monitor margins in FY18; share of low-margin contracts should decline but wage impact could negate gains.