BHEL - Macro headwinds in power sector continue to impact operational performance - KRChoksey

BHEL net sales decreased by 23.5% YoY to Rs. 6,458.1cr, below expectation. Lower operating leverage resulted in sharp decline in EBIDTA margins by 823 bps to 6%. EBIDTA decreased by 68% YoY to Rs. 388.6 cr. Other income arrested fall in profits as it increased to Rs. 538.5 cr on account of forex gain of Rs 325 cr. Consequently, PAT declined by 50% to Rs. 465 cr. Order backlog at the end of the Q1FY14 stands at Rs. 108,600 cr (2.3x TTM sales). The company registered orders worth Rs. 1,468 cr for Q1FY14.

Subdued execution

Net sales decline by 23.5% as both sales in industry and power sector declined by 21% and 34% respectively. Fund constraints continue to impact ongoing power projects, where the project developers are not in a position to release payments. A number of private developers have put on hold their projects which have already been ordered. In some cases the company has been forced to suspend work owing to mounting dues from these project developers (Cash over revenue policy). The company mentioned private players like Bajaj Hindustan, Monnet, Surana, Abhijeet; which are facing funds constraints. Environment and other clearances related issues also impacted execution. The company has guided in best case scenario sales would be flat on a YoY basis as it expects situation to improve in few cases; like Bajaj Hindustan order. However, we believe sales would decline on YoY basis in FY14.

Lower operating leverage impacts EBIDTA

Lower operating leverage resulted in sharp decline in EBIDTA margins to 6%. Staff cost increased by 631 bps to 22.8% of sales; while other expenditure increased by 321 bps to 14.9% of sales. Raw material cost declined by 129bps to 56.3% as initiatives like design optimization, localization of technology and integrated operation have started benefiting the company. Lower commodity prices also contributed positively to raw material cost.

Working capital continues to remain under pressure

Adverse macro condition has resulted in deterioration of working capital cycle. On account of lull in order inflow advances from customer have decreased, while debtors stand at approx Rs 41,000 cr. Of total receivables Rs. 19,000 cr are due for payment; while remaining Rs. 22,000 cr are not due for payment as they are related to completion of milestone. Cash balance stands at Rs. 6,400 cr.

15 GW of tenders expected in FY14

Company registered order inflow to the tune of Rs 1468 cr in Q1FY14. Order backlog stands at Rs. 108,600 cr. During the quarter Rs 1200 cr order from Iraq was also cancelled as it was not moving for last two years. BHEL expects 15GW of orders to tender out in FY14 of which it expects to bag 11 GW of orders.

Our View & Valuation

BHEL registered operational performance below our and market expectation. The scenario is not likely to improve until liquidity in the hands of power developers, issues wrt to project related clearances and linkages improve. We believe BHEL execution will suffer and consequently on account of lower operating leverage earnings would also be impacted. In line we have revised downwards our sales and margins estimates. Considering the same we downgrade the stock to HOLD with price target of Rs 125.

Source : Equity Bulls

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