BHEL - Good 4Q An Aberration, Outlook Still Weak - Kim Eng

Too early to turn positive; Stay at SELL. BHEL's provisional 4QFY13 profit beat consensus by 10% due to asudden pickup in the pace of execution (revenue +6% YoY). This good news can only be applicable to 4Q, as the company has failed to increase its backlog. FY13 order inflow of Rs315bn vs. revenue of Rs500bn shows BHEL's backlog is fast dwindling. For FY14, we see profit falling 24%, which makes the stock unexciting at PER of 9x FY14F. Although the stock is down 25% in past 3 months, we see more downside as problems with the power sector persist. We cut our target PER to 8x FY14F and reduce TP 18% to a low end of consensus Rs166. Maintain SELL.

Power generation sector still struggling. The gov't did not announce reforms for BHEL to kick-start execution of stalled power plants. These plants continue to suffer due to non-availability of coal and delays in land acquisition and environmental clearances. Implementation of recent reforms to improve the financial health of the state-owned power distributors (by restructuring short-term debt) has not yet started.

Backlog diminishing fast, FY14F revenue -20%. In the past 1 year, BHEL's order inflow was Rs315bn whereas revenue was Rs500bn. This leaves the company with a backlog of Rs1.1tn, below the FY09 level. Backlog-to-sales ratio of 2.3x is at 6-yr low. As per the company, new orders of Rs550bn (16k MW) may open for bidding in next 1 year. However this won't be sufficient for BHEL to improve its backlog substantially as total capacity in the country is 27k MW. We forecast BHEL's revenue to decline 20% in FY14.

Poor profit visibility through FY14, EPS to decline 24%. We believe 4Q earnings performance is a one-off and will not repeat in FY14 because the company does not have sufficient backlog to achieve the execution pace similar to FY13. We forecast FY14 EPS to decline 24% to Rs20.2. Last year, receivables rose 8% to 280 days (Rs400bn) as projects are running behind schedule. We expect pressure to continue in FY14 as projects are still stuck.

Maintain SELL. Recovery in backlog is major catalyst to turn positive on BHEL. Although the company is optimistic of more orders inflow this year, we believe power producers will continue to stay away from new capacity because the gov't has not assured coal supply yet. Furthermore, the private sector, which accounts for half of the new power capacity, is struggling to secure finance for power plants due to increased project costs.

Source : Equity Bulls

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