Bharat Heavy Electricals - Macro headwinds continue to impact execution - ICICI Securities

Bharat Heavy Electricals (BHEL) witnessed 22% YoY drop in Q3FY21 revenues to Rs44.5bn implying continued weak execution. Company reported EBITDA loss of Rs1.8bn as raw material cost proportion increased 270bps YoY to 66.1%; however, 56% YoY drop in other expenditure due to focus on cost reduction and net provision withdrawal of Rs510mn partially mitigated the loss. Given subdued execution in the near term, we estimate a net loss of Rs17bn in FY21E; however, we believe execution can recover going forward, hence marginally cut FY22E earnings by 4%. Given the macro challenges, weak balance sheet and uncertainty regarding strategic initiatives that can meaningfully substitute thermal power equipment, we maintain SELL with a revised target price of Rs33 (previously: Rs17). We roll forward valuation to Sep'20E earnings and increase the multiple due to strong Budget impetus to investments.

- Execution impacted by lockdown; expected to be weak in near to medium term: Although operations at manufacturing units and projects sites have reached pre-Covid levels, low productivity and workforce availability at a few sites remain a challenge; hence, overall execution remained weak in Q3FY21. Lack of urgency to execute thermal power projects is a major impediment to near-term growth. With new impetus towards investments in the Budget, we believe there can be some recovery from FY22E onwards.

- Delay in order finalisation indicates lack of urgency at client-end: Apart from being L1 in NTPC Talcher 2x 660MW and some FGD orders, BHEL was also favourably placed in sulphur recovery unit (SRU) for IOCL Panipat in Q3FY21. Company is also hopeful of finalisation of orders from 6x 700MW NPCIL (TG Island package), NTPC Lara, NTPC Singrauli, and 2x 660MW Pench TPP. Order intake fell 35% YoY to Rs39bn in Q3FY21 and the current orderbook stands at Rs1.1trn (7x TTM sales).

- High receivables impacting working capital: Debtors reduced only by Rs580mn from Sep'20 levels and overall debtors remained high at Rs348bn (trade receivables at 262 days) impacted by delay in collection from certain SEBs and private sector. This continues to be a major issue in terms of weakening of the return on capital employed.

- Maintain SELL: Macro challenges in thermal power persist and may further impact execution and revenue growth prospects. Order intake outlook is weak and most of the order finalisations are getting delayed. High receivables at Rs348bn and risk in terms of state and private sector are expected to impact RoCE. Absence of any meaningful alternative to thermal power and weak balance sheet will impact RoC; hence we maintain SELL on the stock. We roll forward valuation to Sep'22E earnings and increase the multiple given new impetus on investment in the Union Budget.

Shares of BHARAT HEAVY ELECTRICALS LTD. was last trading in BSE at Rs.39.8 as compared to the previous close of Rs. 43.55. The total number of shares traded during the day was 7758279 in over 15921 trades.

The stock hit an intraday high of Rs. 41.4 and intraday low of 39.55. The net turnover during the day was Rs. 313037202.

Source : Equity Bulls

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