Bharat Heavy Electricals - Higher provisioning impacts margins - ICICI Securities

Bharat Heavy Electricals (BHEL) witnessed EBIDTA loss of Rs12bn despite revenue growth of 42% YoY and 61% QoQ due to Rs15bn worth of net provisions in Q4FY21. Reduction of Rs41bn in receivables during FY21 led to Rs7.5bn of cashflow from operations. Order intake continues to remain muted and dropped 43% YoY in FY21 at Rs135bn; current orderbook stands at Rs1trn. Given the macro challenges, weak balance sheet and uncertainty regarding strategic initiatives that can meaningfully substitute thermal power equipment, we maintain SELL on the stock with a revised target price of Rs40 (previously: Rs33). Factoring higher provisions, muted growth and stress on margins, we cut earnings by 185% and 15% for FY22E and FY23E, respectively, and maintain SELL with a revised target price of Rs40 (previously: Rs33). We roll forward valuation to FY23E earnings.

- Healthy execution, margins impacted due to provisions: Healthy 42% YoY growth and 61% QoQ growth indicate recovery in execution. However, raw material proportion is high at 69% and there was a net provision of Rs14bn during Q4FY21 resulting in EBIDTA loss of Rs12bn. The company has taken merit-based one-time provisioning of Rs18bn during FY21, we believe, majority of this had been taken during Q4FY21 impacting the overall margins.

- Delay in order finalisation indicates lack of urgency at client-end: Order intake fell 30% YoY to Rs34bn in Q4FY21 and 43% in FY21 to Rs135bn, the current order book stands at Rs1trn (6.5x TTM sales). The company is L1 in NPCIL turbine package for 6x700MW amounting to Rs108bn, NTPC Talcher order for 2x660MW and steam generators for 12 700 MW nuclear power plants. The finalisation of thermal power plant order is getting delayed impacting the overall visibility.

- Reduction in state utility receivables support cashflow: Debtors reduced only by Rs41bn from Mar'20 levels and overall debtors stood at Rs313bn. There has been 21% YoY drop in receivables from state utilities to Rs135bn, while central utilities declined 9% YoY to Rs113bn. This led to overall cash from operations of Rs7.5bn in FY21 despite reported loss of Rs27bn.

- Maintain SELL: Macro challenges in thermal power persist and may further impact execution and revenue growth prospects. Order intake outlook is weak and most order finalisations are getting delayed. High receivables at Rs313bn, growth and margin stress may impact RoCE. Absence of any meaningful alternative to thermal power is likely to weigh on the overall performance in medium to long term, hence, we maintain SELL on the stock. We roll forward valuation to FY23E earnings with an unchanged target multiple of 15x resulting in a target price of Rs40 (previously Rs33 at 15x Sept'22 earnings).

Shares of BHARAT HEAVY ELECTRICALS LTD. was last trading in BSE at Rs.69.65 as compared to the previous close of Rs. 67.35. The total number of shares traded during the day was 7153126 in over 22707 trades.

The stock hit an intraday high of Rs. 72 and intraday low of 67. The net turnover during the day was Rs. 501733674.

Source : Equity Bulls

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