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Bharat Heavy Electricals (BHEL)
Overweight
BHEL.BO, BHEL IN
Still a relative value pick, though order inflow concerns
are looming
Management assuaged concerns on weak execution. Port clearance issues
at JNPT delayed receipt of imported components and adversely impacted
sales booking by ~Rs6-7bn in Jun-q. This largely explains the gap between
reported sales of Rs71.3bn (up 10% YoY) vs. est. of Rs77.6bn.
Management reiterated gross revenue target of Rs500bn for FY12 (vs. our
est. of Rs492bn).
Other variations in P&L too were explained adequately: Exceptionally
high industry segment margins (22.3%, up 870bps) were attributed to
profitable jobs executed during the quarter, though full year margin outlook
is stable. Employee costs registered a dip of 2.8% YoY as 1QFY11 number
included Rs680mn provision for gratuities. Tax-rate decline by 230bps (to
31%) was due to Rs510mn tax-credit on R&D expenses during the quarter.
Strong other income (up 52%) was attributed to higher yield on cash in BS
(implied annualized yield of ~10%).
Delays in order finalization a key concern: BHEL reported only Rs25bn
of inflows (~90% from industry segment) in Jun-q. Macro issues (land, fuel,
policy inaction, cost of funds) impacting investment sentiment in IPPs have
taken a toll on order placement as well. Management admitted to having LoI
on ~2GW orders (from Rajasthan SEB) which are yet to be booked. Mgt
also indicated a 9GW order flow pipeline, which can potentially be awarded
if and when land / funding / clearances materialize. However there appears
to be a fair likelihood that NTPC bulk tenders (especially 9x800MW) and a
few SEB-JV orders may spillover to early FY13. While near-term
deferment of order inflows does not pose a risk to FY12/13 estimates it is
likely to heighten street fears around medium term growth and competitive
intensity, in our view. There have been no cancellations though.
Value pick. At CMP BHEL is trading at 12.2x FY13 EPS and earnings are
backed by current backlog. Within our universe of investment plays, most
of which are dealing with issues on fuel, regulations, clearances, balance
sheet and even corporate governance issues, we think BHEL offers the best
risk-return and revenue visibility, with RoE of ~30%, de-levered balance
sheet with net cash of Rs96B and FCF yield of ~4%. Maintain OW
Key takeaways from BHEL Jun-q
conference call
The variations in operating cost and weak execution witnessed in Jun-q (see our
1QFY12 result note) was adequately explained by management on the call. However,
exceptionally weak order inflows during the quarter and commentary on macro
issues impacting order finalizations by IPPs is a near & present cause of concern.
BHEL has reported average order flows in the range of Rs560-600bn over past three
years. However potential deferment of NTPC bulk contract awards and lean booking
of state JV orders poses a downside risk to order inflows in FY12.
Delays in order finalization
BHEL reported order inflows of just Rs24.7bn in Jun-q (down 77% YoY). Of this
~89% (Rs21.9bn) orders were booked in the industry segment. Small ticket orders
for equipment spares accounted for weak bookings in the power segment during the
quarter.
According to management rising cost of capital, land acquisition delays, coal linkage
issues for projects, and deferment of policy decisions (for instance EGoM to address
coal related issues has been deferred twice over past couple of months) have
impacted order inflows during the quarter. BHEL expects a policy push by
government to ease factors impeding order finalization by IPPs over next 3-4
months.
Management indicated that for ~2GW orders BHEL has the LoI (letter of intent)
from customers, but the orders were not booked during the quarter. The company
may be referring to 12th Plan projects of Rajasthan SEB where price bids have been
opened and BHEL is the lowest bidder. The projects include Suratgarh TPS Units 7,8
(1320MW) and Chhabra TPS (1320MW). Assuming turnkey scope the size of
Rajasthan SEB orders could potentially be ~Rs100bn, in our view.
Commentary on bulk tenders and State JV orders not
encouraging
NTPC-DVC's 11x660MW tender for sourcing supercritical boilers continues to be
held up for over 15months now, owing to its legal battle with Ansaldo Caldaie. The
case did not come up for hearing on its last scheduled date (20th July).
NTPC 9x800MW supercritical BTG bulk awards are expected to happen by end of
3QFY12 (Dec-11). NTPC plans to use the equipment at its projects at Lara
(2x800MW) in Chhattisgarh, Darllipalli (2x800MW) and Gajmara (2x800MW) in
Orissa and Kudgi (3x800MW) in Karnataka. Going by the experience of delays in
the 660MW bulk tenders, the timeline appears ambitious, in our view. NTPC had
opened technical bids (5 players in fray for boilers and 5 for TG sets) in early Jun-
2011. Like the 660MW version, BHEL is once again assured of a minimum number
of BTG sets, till it matches the L1 bid.
In our estimate, the NTPC bulk tenders account for ~Rs110bn of order inflow
expectation for BHEL in FY12 and spillover to next fiscal constitutes a key risk to
order inflows.
According to management, of the state JV orders, 2x800MW Udangudi (Tamil Nadu
SEB) order is most likely to get awarded by 3Q-4QFY12. The Maharashtra/MP state
JV orders are likely to take some more time.
See Table 1 for potential size of order opportunities constituted by bulk tenders and
state JV orders for BHEL in FY12. Management commented that they are in active
discussion for over 9GW potential orders- but this does not appear substantial given
it includes NTPC bulk tenders
Jun-q topline disappointment explained reasonably well
According to management port clearance issues at JNPT (India's largest container
port near Mumbai) impacted execution in Jun-q. The port was closed for ~6 weeks
and this delayed receipt of imported components and adversely impacted sales
booking by ~Rs6-7bn during the quarter. BHEL has reported sales of Rs71.3bn (up
10% YoY) vs. our expectation of Rs77.6bn (up ~20% YoY). The gap is well
explained by the above argument.
Mr. BP Rao (CMD- BHEL) said that the gross revenue target to achieve 'Excellent'
rating accorded to PSUs is ~Rs450bn, but the company will strive to reach Rs500bn
revenue in FY12 (our est. of gross revenue for FY12 is Rs492bn).
Explanations on margin and costing variations in Jun-q
Management attributed exceptionally high PBIT margins in Industry segment
(22.6%, up 870bps) to execution of profitable projects during the quarter.
Management remarked that CPP customers are moving to higher MW ratings and
this is also benefiting margins. However for the full year the industry segment
margins are expected to remain at historical levels.
Employee cost in Jun-q had dipped ~2.8% YoY as 1QFY11 number included
~Rs680mn provision for gratuities. For the full year management expects 3%
inflation in salaries and is likely to add ~3000 employees. The company has guided
to ~Rs62bn of staff cost in FY12 (vs. our est. of Rs63.7bn building a slight buffer)
The tax-rate decline to 31% in Jun-q (down 230bps) was attributed to Rs510mn taxcredit for R&D expenses. Sharp increase in other income (up 52% YoY) was
attributed to higher yield on cash (Rs96bn cash on BS as of Mar-11, Rs2.5bn other
income in Jun-q).
Media reports (Business Line) had stated that BHEL has introduced usance LC (a
form of deferred letter of credit) targeted at private power project developers. The LC
basically allows project developers a grace period for payment to BHEL against
equipment orders. Management clarified that this tool has been used selectively to
attract few private sector players who were previously placing orders on Chinese
equipment suppliers (which in turn have been offering payment support to customers
through low cost China EXIM financing).
BHEL remains a value pick though order
inflow concerns are near and present
Post results we have maintained estimates (~2% below consensus). On our EPS
estimates the stock is trading attractively at 13.9x FY12 and 12.3x FY13. While
near-term deferment of order inflows does not pose a risk to FY12/13 estimates, it is
likely to heighten fears of – a) weak medium term growth for BHEL, b) risk of
capacity under-utilization and c) competitive intensity in the BTG manufacturing
space with more players chasing fewer orders. We note that there have been no order
cancellations and only a deferment in timing of awards owing to macro issues which
are expected to be addressed by policy action over the next few months.
In our view, at current valuations the de-rating factors are largely in the price; we
maintain OW. Within our universe of investment plays, most of which are dealing
with issues on fuel, regulations, clearances, balance sheet and even corporate
governance issues, we think BHEL offers the best risk-return and revenue visibility,
with RoE of ~30%, de-levered balance sheet with net cash of Rs96B and FCF yield
of ~4%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals (BHEL)
Overweight
BHEL.BO, BHEL IN
Still a relative value pick, though order inflow concerns
are looming
Management assuaged concerns on weak execution. Port clearance issues
at JNPT delayed receipt of imported components and adversely impacted
sales booking by ~Rs6-7bn in Jun-q. This largely explains the gap between
reported sales of Rs71.3bn (up 10% YoY) vs. est. of Rs77.6bn.
Management reiterated gross revenue target of Rs500bn for FY12 (vs. our
est. of Rs492bn).
Other variations in P&L too were explained adequately: Exceptionally
high industry segment margins (22.3%, up 870bps) were attributed to
profitable jobs executed during the quarter, though full year margin outlook
is stable. Employee costs registered a dip of 2.8% YoY as 1QFY11 number
included Rs680mn provision for gratuities. Tax-rate decline by 230bps (to
31%) was due to Rs510mn tax-credit on R&D expenses during the quarter.
Strong other income (up 52%) was attributed to higher yield on cash in BS
(implied annualized yield of ~10%).
Delays in order finalization a key concern: BHEL reported only Rs25bn
of inflows (~90% from industry segment) in Jun-q. Macro issues (land, fuel,
policy inaction, cost of funds) impacting investment sentiment in IPPs have
taken a toll on order placement as well. Management admitted to having LoI
on ~2GW orders (from Rajasthan SEB) which are yet to be booked. Mgt
also indicated a 9GW order flow pipeline, which can potentially be awarded
if and when land / funding / clearances materialize. However there appears
to be a fair likelihood that NTPC bulk tenders (especially 9x800MW) and a
few SEB-JV orders may spillover to early FY13. While near-term
deferment of order inflows does not pose a risk to FY12/13 estimates it is
likely to heighten street fears around medium term growth and competitive
intensity, in our view. There have been no cancellations though.
Value pick. At CMP BHEL is trading at 12.2x FY13 EPS and earnings are
backed by current backlog. Within our universe of investment plays, most
of which are dealing with issues on fuel, regulations, clearances, balance
sheet and even corporate governance issues, we think BHEL offers the best
risk-return and revenue visibility, with RoE of ~30%, de-levered balance
sheet with net cash of Rs96B and FCF yield of ~4%. Maintain OW
Key takeaways from BHEL Jun-q
conference call
The variations in operating cost and weak execution witnessed in Jun-q (see our
1QFY12 result note) was adequately explained by management on the call. However,
exceptionally weak order inflows during the quarter and commentary on macro
issues impacting order finalizations by IPPs is a near & present cause of concern.
BHEL has reported average order flows in the range of Rs560-600bn over past three
years. However potential deferment of NTPC bulk contract awards and lean booking
of state JV orders poses a downside risk to order inflows in FY12.
Delays in order finalization
BHEL reported order inflows of just Rs24.7bn in Jun-q (down 77% YoY). Of this
~89% (Rs21.9bn) orders were booked in the industry segment. Small ticket orders
for equipment spares accounted for weak bookings in the power segment during the
quarter.
According to management rising cost of capital, land acquisition delays, coal linkage
issues for projects, and deferment of policy decisions (for instance EGoM to address
coal related issues has been deferred twice over past couple of months) have
impacted order inflows during the quarter. BHEL expects a policy push by
government to ease factors impeding order finalization by IPPs over next 3-4
months.
Management indicated that for ~2GW orders BHEL has the LoI (letter of intent)
from customers, but the orders were not booked during the quarter. The company
may be referring to 12th Plan projects of Rajasthan SEB where price bids have been
opened and BHEL is the lowest bidder. The projects include Suratgarh TPS Units 7,8
(1320MW) and Chhabra TPS (1320MW). Assuming turnkey scope the size of
Rajasthan SEB orders could potentially be ~Rs100bn, in our view.
Commentary on bulk tenders and State JV orders not
encouraging
NTPC-DVC's 11x660MW tender for sourcing supercritical boilers continues to be
held up for over 15months now, owing to its legal battle with Ansaldo Caldaie. The
case did not come up for hearing on its last scheduled date (20th July).
NTPC 9x800MW supercritical BTG bulk awards are expected to happen by end of
3QFY12 (Dec-11). NTPC plans to use the equipment at its projects at Lara
(2x800MW) in Chhattisgarh, Darllipalli (2x800MW) and Gajmara (2x800MW) in
Orissa and Kudgi (3x800MW) in Karnataka. Going by the experience of delays in
the 660MW bulk tenders, the timeline appears ambitious, in our view. NTPC had
opened technical bids (5 players in fray for boilers and 5 for TG sets) in early Jun-
2011. Like the 660MW version, BHEL is once again assured of a minimum number
of BTG sets, till it matches the L1 bid.
In our estimate, the NTPC bulk tenders account for ~Rs110bn of order inflow
expectation for BHEL in FY12 and spillover to next fiscal constitutes a key risk to
order inflows.
According to management, of the state JV orders, 2x800MW Udangudi (Tamil Nadu
SEB) order is most likely to get awarded by 3Q-4QFY12. The Maharashtra/MP state
JV orders are likely to take some more time.
See Table 1 for potential size of order opportunities constituted by bulk tenders and
state JV orders for BHEL in FY12. Management commented that they are in active
discussion for over 9GW potential orders- but this does not appear substantial given
it includes NTPC bulk tenders
Jun-q topline disappointment explained reasonably well
According to management port clearance issues at JNPT (India's largest container
port near Mumbai) impacted execution in Jun-q. The port was closed for ~6 weeks
and this delayed receipt of imported components and adversely impacted sales
booking by ~Rs6-7bn during the quarter. BHEL has reported sales of Rs71.3bn (up
10% YoY) vs. our expectation of Rs77.6bn (up ~20% YoY). The gap is well
explained by the above argument.
Mr. BP Rao (CMD- BHEL) said that the gross revenue target to achieve 'Excellent'
rating accorded to PSUs is ~Rs450bn, but the company will strive to reach Rs500bn
revenue in FY12 (our est. of gross revenue for FY12 is Rs492bn).
Explanations on margin and costing variations in Jun-q
Management attributed exceptionally high PBIT margins in Industry segment
(22.6%, up 870bps) to execution of profitable projects during the quarter.
Management remarked that CPP customers are moving to higher MW ratings and
this is also benefiting margins. However for the full year the industry segment
margins are expected to remain at historical levels.
Employee cost in Jun-q had dipped ~2.8% YoY as 1QFY11 number included
~Rs680mn provision for gratuities. For the full year management expects 3%
inflation in salaries and is likely to add ~3000 employees. The company has guided
to ~Rs62bn of staff cost in FY12 (vs. our est. of Rs63.7bn building a slight buffer)
The tax-rate decline to 31% in Jun-q (down 230bps) was attributed to Rs510mn taxcredit for R&D expenses. Sharp increase in other income (up 52% YoY) was
attributed to higher yield on cash (Rs96bn cash on BS as of Mar-11, Rs2.5bn other
income in Jun-q).
Media reports (Business Line) had stated that BHEL has introduced usance LC (a
form of deferred letter of credit) targeted at private power project developers. The LC
basically allows project developers a grace period for payment to BHEL against
equipment orders. Management clarified that this tool has been used selectively to
attract few private sector players who were previously placing orders on Chinese
equipment suppliers (which in turn have been offering payment support to customers
through low cost China EXIM financing).
BHEL remains a value pick though order
inflow concerns are near and present
Post results we have maintained estimates (~2% below consensus). On our EPS
estimates the stock is trading attractively at 13.9x FY12 and 12.3x FY13. While
near-term deferment of order inflows does not pose a risk to FY12/13 estimates, it is
likely to heighten fears of – a) weak medium term growth for BHEL, b) risk of
capacity under-utilization and c) competitive intensity in the BTG manufacturing
space with more players chasing fewer orders. We note that there have been no order
cancellations and only a deferment in timing of awards owing to macro issues which
are expected to be addressed by policy action over the next few months.
In our view, at current valuations the de-rating factors are largely in the price; we
maintain OW. Within our universe of investment plays, most of which are dealing
with issues on fuel, regulations, clearances, balance sheet and even corporate
governance issues, we think BHEL offers the best risk-return and revenue visibility,
with RoE of ~30%, de-levered balance sheet with net cash of Rs96B and FCF yield
of ~4%.
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