Bharat Heavy Electricals - Near-Term Execution Weak; Outlook Gradually Improving; Result Update Q2FY15 :Edelweiss

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Bharat Heavy Electricals (BHEL) extended its weak performance on revenue front, which fell 31% YoY for Q2FY15 hit by sluggish execution. EBITDA margin, at 4.7%, was flat YoY. PAT slumped 73% due to the combination of weak operating performance and lower other income (down 60% YoY). Led by 2 big ticket size EPC orders, BHEL recorded order intake of INR150bn in H1FY15 versus INR45bn in H1FY14. Management expects total industry ordering of 15GW (5GW already ordered) in FY15 apart from some state-specific one-on-one ordering. We believe the ordering scenario led by resolution of the coal crisis, the government’s policy focus on power sector and pick up in industrial activity, may result in gradual improvement in order intake. Ergo, we revise upwards our target multiple to long-term average P/E of 17x.

Execution challenges persist, PAT crumbles

Revenue extended sluggish momentum in Q2FY15 as well, predominantly impacted by continued execution delays. Revenue decline of 31% YoY was primarily owing to the 37% drop in power segment. Margin at 4.7% was flat YoY. We believe that if it were not for the sharp decline in provisions, margins could have eroded. PAT collapsed by 73% YoY to INR1.25bn hit by lower operating performance, 60% drop in other income and higher tax rate (40% versus 30% normal).

Order book flat; 10GW of PSU ordering yet to be finalised

Order book stood at INR1,037bn (flat YoY, up 6% sequentially) as at end Q2FY15. BHEL maintained guidance of ~15GW of ordering in FY15 out of which 5GW is already ordered. In addition, there are some contracts where the company is negotiating with the SEBs on one-on-one basis — for instance 6GW of Telangana on EPC basis.

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https://www.edelweiss.in/research/Bharat-Heavy-Electricals--Near-Term-Execution-Weak;-Outlook-Gradually-Improving;-Result-Update-Q2FY15/27603.html