BHEL’s financials will continue to be hit by (1) weak orders relative to its base size, (2) high proportion of slow-moving orders in its backlog, (3) potential gross margin decline on orders won in weak times and (4) higher provisions. Despite several moving variables, the stock is pricing in a benign scenario on all these and assigning a normalised exit multiple. Downside risks to our estimates on order inflows, gross margin, provisioning, staff costs and cash flows for FY2015-17 are higher than upside risks. We revise our target price to R200 (from R160) at 13x FY2017e EPS.
BHEL reported a sharp 32% y-o-y decline in revenues, with the decline largely concentrated in the power sector. Negative operating leverage led to continued weak EBITDA margin at 3%.
Execution was impacted on the back of a depleted backlog and large share of stuck projects. During Q2FY15, 3 GW of stuck projects did start moving again as payment cycle resumed. BHEL is positive on the remaining 12 GW of projects starting to contribute though does not expect a sharp up-tick in these projects over the next few quarters.
Q2FY15 order inflow improved from a low base to R12,900 crore, resulting in a flat y-o-y order backlog. Our analysis suggests that project awards could face delays led by delays in land acquisition and clearances, time gap in reallocation of captive coal blocks, etc. FY2016 ordering is contingent upon removal of key bottlenecks, as suggested above; we already bake in a strong order inflow.
By Kotak Institutional Equities
