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Bharat Heavy Electricals --------------------------------------------------------- Maintain NEUTRAL
1Q disappoints on both execution and inflows
● Execution trajectory for BHEL appears to have slowed down
materially with only 10% sales growth in 1Q. Management
attributed this to logistics issues (some imported supplies could
not be delivered on time due to issues at port, while some
shipments got delayed), which are structural issues in India.
Management’s sales target of Rs500 bn stays for now.
● Order inflow of only Rs24 bn in 1Q was disappointing, but reflects
the weak ordering in the power equipment sector due to issues
with coal linkages and financial closures, etc. Management
expects a recovery in inflows (NTPC bulk tender in 2Q and
Rajasthan state utility order, etc.). However, a delay in inflows
impacts revenue booking in future quarters. The 10% growth
guidance in FY12 was unchanged.
● The situation for power equipment manufacturers is tough, in our
view, and the limited orders up for bids in 2Q could see
aggressive price competition. We revised down our FY13 EPS by
1%. We maintain NEUTRAL with a revised target price of Rs2142.
(15.5x FY12E).
Management conference call takeaways
1Q order inflows were ~Rs24.71 bn, out of which core industrial order
inflows were at ~Rs21.9 bn. Major orders awarded were: (1) ONGC
order ~Rs9,300 mn, (2) CFBC boiler order from Kohinoor Power , (3)
JSW Steel order for Bellary CPP, (4) Punjab SEB transformers order
~Rs1,000 mn, (5) 5 MW solar PV project Karnataka ~Rs650 mn and
(6) ~Rs1,200 mn EMU order from the Railways. Around 1,275 MW of
projects were commissioned in 1Q by BHEL with another ~2,250 MW
of projects having completed synchronisation. Management
commented that total commissioning target for FY12 was ~12,000
MW. Management highlighted that sales growth in 1Q was hampered
because of lack of clearances at ports and airports, which delayed
shipments and import of key components from collaborators (JNPT
port was closed for six weeks as new systems were being installed).
Management commented that coal linkage and environmental
clearance issues were short-term issues and should be resolved
sooner or later.
Order pipeline
Management maintained that even though it had the Letter of Intent
for orders of ~2,000 MW, orders were not booked because of lack of
customer advances (various milestones may not have been achieved
including coal linkages). About 9,000 MW of projects were in an
advanced stage of awarding, including orders from NTPC (bulk
tender), RRVUNL, Visa Power and Tata. Management appeared
confident of winning both the Rajasthan orders.
Of the state JVs, management is expecting the Udangudi order to be
finalised in FY12 (land acquisition is underway in Latur; BHEL looking
for a strategic partner for Khandwa TPP). Management mentioned
that similar JVs may be formed in AP, Orissa and Tripura (i.e.,
investments in lower ROE business will continue).
1Q results analysis
Management highlighted that wage costs came down this quarter on a
YoY basis on account of one-off expenses incurred in 1Q FY10. FY12
wage expense was expected to be higher at ~Rs60 bn on account of
~3% hike in core wages and employee recruitment. Other expenditure
was higher ~45% YoY due to ~Rs1,140 mn provisioning done for
contractual obligations. Other income was significantly higher (~38%
YoY) due to higher interest rates and with 1Q tax rate falling
marginally on R&D expenditure credit (~Rs510 mn under Section 35).
NTPC-BHEL JV
NTPC-BHEL JV is currently executing three projects worth ~Rs50 bn
and has signed two technology agreements in ash handling. It has bid
for one NTPC EPC project and is recruiting manpower for its
expansion plans.
T&D
Management highlighted that T&D contributes to ~5-6% of BHEL’s
total revenue and that it has 45,000 MVA capacity post the expansion
in Jhansi and Bhopal plants. It has signed a MOU with Toshiba to
supply products in the higher KV range. Management commented that
order pipeline in the T&D segment appears strong (1200 KV
equipment is currently being tested at Bina).
Industrial segment
Margins in the industrial segment were higher as BHEL had
undertaken jobs with higher margins and the segment as a whole is
shifting to higher rating (higher MW) equipment.
Spares
Management commented that spares business contributes ~25% of
total revenues. Although this business is set to grow further, as more
number of sets are supplied, the renovation and modernisation
business (R&M) will be subdued, as project viability may decrease
(lower incremental output vs costs may reduce order awards).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals --------------------------------------------------------- Maintain NEUTRAL
1Q disappoints on both execution and inflows
● Execution trajectory for BHEL appears to have slowed down
materially with only 10% sales growth in 1Q. Management
attributed this to logistics issues (some imported supplies could
not be delivered on time due to issues at port, while some
shipments got delayed), which are structural issues in India.
Management’s sales target of Rs500 bn stays for now.
● Order inflow of only Rs24 bn in 1Q was disappointing, but reflects
the weak ordering in the power equipment sector due to issues
with coal linkages and financial closures, etc. Management
expects a recovery in inflows (NTPC bulk tender in 2Q and
Rajasthan state utility order, etc.). However, a delay in inflows
impacts revenue booking in future quarters. The 10% growth
guidance in FY12 was unchanged.
● The situation for power equipment manufacturers is tough, in our
view, and the limited orders up for bids in 2Q could see
aggressive price competition. We revised down our FY13 EPS by
1%. We maintain NEUTRAL with a revised target price of Rs2142.
(15.5x FY12E).
Management conference call takeaways
1Q order inflows were ~Rs24.71 bn, out of which core industrial order
inflows were at ~Rs21.9 bn. Major orders awarded were: (1) ONGC
order ~Rs9,300 mn, (2) CFBC boiler order from Kohinoor Power , (3)
JSW Steel order for Bellary CPP, (4) Punjab SEB transformers order
~Rs1,000 mn, (5) 5 MW solar PV project Karnataka ~Rs650 mn and
(6) ~Rs1,200 mn EMU order from the Railways. Around 1,275 MW of
projects were commissioned in 1Q by BHEL with another ~2,250 MW
of projects having completed synchronisation. Management
commented that total commissioning target for FY12 was ~12,000
MW. Management highlighted that sales growth in 1Q was hampered
because of lack of clearances at ports and airports, which delayed
shipments and import of key components from collaborators (JNPT
port was closed for six weeks as new systems were being installed).
Management commented that coal linkage and environmental
clearance issues were short-term issues and should be resolved
sooner or later.
Order pipeline
Management maintained that even though it had the Letter of Intent
for orders of ~2,000 MW, orders were not booked because of lack of
customer advances (various milestones may not have been achieved
including coal linkages). About 9,000 MW of projects were in an
advanced stage of awarding, including orders from NTPC (bulk
tender), RRVUNL, Visa Power and Tata. Management appeared
confident of winning both the Rajasthan orders.
Of the state JVs, management is expecting the Udangudi order to be
finalised in FY12 (land acquisition is underway in Latur; BHEL looking
for a strategic partner for Khandwa TPP). Management mentioned
that similar JVs may be formed in AP, Orissa and Tripura (i.e.,
investments in lower ROE business will continue).
1Q results analysis
Management highlighted that wage costs came down this quarter on a
YoY basis on account of one-off expenses incurred in 1Q FY10. FY12
wage expense was expected to be higher at ~Rs60 bn on account of
~3% hike in core wages and employee recruitment. Other expenditure
was higher ~45% YoY due to ~Rs1,140 mn provisioning done for
contractual obligations. Other income was significantly higher (~38%
YoY) due to higher interest rates and with 1Q tax rate falling
marginally on R&D expenditure credit (~Rs510 mn under Section 35).
NTPC-BHEL JV
NTPC-BHEL JV is currently executing three projects worth ~Rs50 bn
and has signed two technology agreements in ash handling. It has bid
for one NTPC EPC project and is recruiting manpower for its
expansion plans.
T&D
Management highlighted that T&D contributes to ~5-6% of BHEL’s
total revenue and that it has 45,000 MVA capacity post the expansion
in Jhansi and Bhopal plants. It has signed a MOU with Toshiba to
supply products in the higher KV range. Management commented that
order pipeline in the T&D segment appears strong (1200 KV
equipment is currently being tested at Bina).
Industrial segment
Margins in the industrial segment were higher as BHEL had
undertaken jobs with higher margins and the segment as a whole is
shifting to higher rating (higher MW) equipment.
Spares
Management commented that spares business contributes ~25% of
total revenues. Although this business is set to grow further, as more
number of sets are supplied, the renovation and modernisation
business (R&M) will be subdued, as project viability may decrease
(lower incremental output vs costs may reduce order awards).
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