Bharat Heavy Electricals (BHEL) - Still a relative value pick, though order inflow concerns are looming:: JPMorgan

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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.