Bharat Heavy Electricals- Order inflow woes persist .:: Macquarie Research

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Bharat Heavy Electricals
Order inflow woes persist
Event
 BHEL reported its 1Q FY12 results, with 10% and 22% YoY growth in
revenues and earnings, respectively. Order inflow in 1Q FY12 was muted,
with no orders in the core power equipment sector. We maintain our cautious
stance on the company with a Neutral rating and target price of Rs2,100.
Impact
 Revenue miss of 8% in 1Q FY12, guidance of Rs50bn gross sales in FY12:
Revenues grew 10% YoY to Rs72.7bn. Management attributes the modest
growth to a delay in imports due to closure of Mumbai ports for six weeks and a
certain delay from customers. However, BHEL is still confident of achieving
Rs500bn gross revenues in FY12. While our numbers are largely in line with the
guidance, we think the street’s estimates have potential 2–3% downside.
 Margins saved by high-margin industrial orders, power margins to fall:
EBITDA margin at 15.3% was 70bp higher YoY. Margin improvement was
seen in industrials (largely due to high margin orders). We continue to believe
that full-year margins would be ~19.3% (down 90bp YoY), as low-margin
supercritical and EPC orders start contributing to revenues in FY12.
 Cost levers for margin surprise are limited: BHEL has guided for Rs60bn
staff expenses in FY12, driven by a 3% hike to the existing workforce and the
addition of 3,000 new workers. We continue to hold on to our staff cost
estimate of Rs63bn, as we believe an inflation-linked hike would be higher
than 3% (WPI average was higher than 9% in FY11). Similarly, at the net
profit level benefits from higher other income get offset by higher depreciation.
 Achieving 10% inflow growth guidance could be challenging: 1Q FY12 has
been a washout quarter, with no order inflow in the core power equipment
sector. BHEL’s optimism of achieving Rs650bn order inflow (10% growth) in
FY12 could be at risk given the delay in the NTPC 660MW bulk tender and
order finalisations by other customers. Moreover, the quality of order booking
should continue to remain under pressure as ~40–50% of FY12 order bookings
are likely to be EPC orders (JV projects with SEBs and Rajasthan SEB orders).
 FPO likely in October–November, overhang to continue: The company
has appointed investment bankers and legal advisers for the issue and
expects the FPO to happen in October–November 2011.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs2,100.00 based on a PER methodology.
 Catalyst: weak order inflow in FY12, FPO price lower than current price.
Action and recommendation
 Order inflow challenging, earnings growth to decelerate: We remain
concerned about order inflow and margin pressure from supercritical and EPC
orders. The FPO overhang further adds to the woes. Earnings growth is likely
to slow to single digits in FY13. Retain Neutral with target price of Rs2,100
(16x average FY12E and FY13E EPS).


1Q FY12 – earnings growth supported by higher margins and other
income
 Revenue growth modest at 10%, hit by several issues: Revenue at Rs72.7bn was up 10%
YoY. Management attributes slow growth in revenues to evacuation issues at Mumbai port (sixweek
closure due to installation of new custom systems) and certain client-related issues. The
company claims to have sorted out these issues and expects to deliver 23% growth in gross
revenues at Rs500bn.
 Margin supported by high-margin orders: Margin at 15.3% was 70bp higher YoY. The increase
in margin is mainly due to high-margin orders secured earlier.
 Order inflow woes significant, dry quarter for power orders: BHEL booked Rs24.7bn orders in
1Q FY12 – Rs22bn from the industrial segment and the remaining Rs2.7bn from spares and
others. The company did not book any power sector orders despite having LoI from 1,500–
2,000MW due to a lack of customer advances. BHEL is also hopeful of meeting its Rs650bn FY12
order inflow guidance, as it is in advanced stages of negotiation in 9,000MW orders and would
also book two to three joint venture projects with state electricity boards in FY12.
 Working capital increase due to lower advances: Lack of power sector orders in 1Q FY12
resulted in lower customer advances and an increase in working capital. Working capital
increased by Rs17bn to Rs142bn (from Rs125bn at FY11-end).