Bharat Heavy Electricals - Dismal performance, challenging outlook - ICICI Securities

Bharat Heavy Electricals (BHEL) witnessed 56% YoY drop in revenues to Rs20bn implying continued weak execution. The company reported EBITDA loss of Rs10.6bn as material costs increased 830bps YoY to 65.9%; however, 48% YoY drop in other expenditure due to focus on cost reduction and lower provision partially mitigated losses. Given subdued execution, high raw material and fixed expense, we estimate a net loss of Rs1.5bn in FY21E and cut FY22E earnings by 10%. Given the macro challenges, weak balance sheet and uncertainty regarding strategic initiatives that can meaningfully substitute thermal power equipment, we downgrade the stock to SELL (from Reduce) with a revised target price of Rs24 (previously: Rs27).

- Execution impacted by lockdown; expected to be weak in near to medium term: Overall execution was weak in Q1FY21 due to the lockdown. The lack of urgency to execute thermal power project and the focus on renewables by the government is likely to impact overall growth prospects of BHEL. We expect execution weakness to continue in near to medium term.

- Delay in order finalisation indicates lack of urgency at client-end: BHEL is L1 in NTPC Talcher 2x 660MW and some FGD orders. It is also hopeful of finalisation of orders from SCCL Adilabad (1x 800MW), NLC Talabira, NTPC Lara, NTPC Singrauli, and orders from Nuclear Power Corporation. Order intake declined 62% YoY to Rs15bn in Q1FY21 and current orderbook stands at Rs1.1trn (5.7x TTM sales). We believe, apart from NTPC Talcher, other orders may postpone to FY22E.

- High receivables impacting working capital: Debtors remained high at Rs353bn impacted by delay in collection from certain SEBs and private sector. Retention money has decreased marginally to Rs154bn from Rs157bn in March 2020. This continues to be a major issue in terms of weakening of the return on capital employed.

- Downgrade to SELL: Macro challenges in thermal power continue to persist and may further impact execution and revenue growth prospects. Order intake outlook is weak and most of the order finalisation are getting delayed. High receivables at Rs353bn and risk in terms of state and private sector is expected to impact ROCE. Absence of any meaningful alternative to thermal power and weak balance sheet are likely to impact return on capital; hence, we downgrade the stock to SELL.

Shares of BHARAT HEAVY ELECTRICALS LTD. was last trading in BSE at Rs.37.05 as compared to the previous close of Rs. 37.05. The total number of shares traded during the day was 1069546 in over 3189 trades.

The stock hit an intraday high of Rs. 37.9 and intraday low of 37. The net turnover during the day was Rs. 39982250.

Source : Equity Bulls

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