Bharat Heavy Electricals - Snowballing of macro headwinds impacts execution - ICICI Securities

Bharat Heavy Electricals (BHEL) witnessed 41% YoY drop in revenues to Rs37bn implying continued weak execution. The company reported EBITDA loss of Rs6.3bn as material costs increased 170bps YoY to 64.5%; however, 23% YoY drop in other expenditure due to focus on cost reduction and lower provision at Rs260mn partially mitigated losses. Given subdued execution, high raw material and fixed expense, we estimate net loss of Rs14.1bn in FY21E and cut FY22E earnings by 53%. 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 Rs17 (previously: Rs24).

- Execution impacted by lockdown; expected to be weak in near to medium term: Although operations at major sites have now reached 90%, low productivity and workforce availability at few sites still remain a challenge, hence, overall execution was weak in Q2FY21. Lack of urgency to execute thermal power project and the focus on renewables by the government may impact the 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 50% YoY to Rs37bn in Q2FY21 and the current orderbook stands at Rs1.1trn (6.6x TTM sales). We believe apart from NTPC Talcher, other orders may get deferred to FY22E.

- High receivables impacting working capital: Debtors reduced by Rs4.7bn from Jun'20; however, overall debtors remained high at Rs349bn (254 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 continue to persist and may further impact execution and revenue growth prospects. Order intake outlook is weak and most of the order finalisation is getting delayed. High receivables at Rs349bn 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 return on capital, hence, we maintain SELL.

Shares of BHARAT HEAVY ELECTRICALS LTD. was last trading in BSE at Rs.28.3 as compared to the previous close of Rs. 28. The total number of shares traded during the day was 485771 in over 2404 trades.

The stock hit an intraday high of Rs. 28.4 and intraday low of 28.2. The net turnover during the day was Rs. 13747156.

Source : Equity Bulls

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