n In-line sales and below-expectation margin; weakness in both exacerbates in Q4FY14.
n In-line sales. Bhel has reported in-line sales of R155 bn in Q4FY14. This represents a 22% y-o-y decline versus 18% y-o-y decline over 9M(month)FY14. Bhel commissioned/synchronised 13.4 GW of power plants for the full year, up 30% y-o-y (includes 11.2 GW for utilities).
n Sharp margin miss. Q4FY14 PBT (profit before tax) at R23.6 bn was significantly lower than our R30 bn estimate. Assuming reasonable estimates for other income and depreciation, this implies an Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin of 15.3% in Q4FY14 versus our estimate of 19.6% (down 700 bps y-o-y versus 600 bps y-o-y decline in Q3FY14). Year-on-year results are not comparable this year because of BHPV merger. PAT at R16 bn declined 50% y-o-y (similar decline in full-year PAT).
n We note, 2-2.5% average revision in annual PBT results (actual versus flash) over the past seven years, suggesting a much larger impact at a quarterly level. Order inflows surprise a tad, though still yield a weaker year-ending backlog. Q4FY14 order inflows at
R163 bn were better than expected (R133 bn estimate) and against declared orders of R113 bn (3.6 GW of thermal power orders, 0.3 GW of hydro power orders).
Year-end backlog of R1,015 bn suggesting a limited visibility of 2.9 years of revenues is marginally lower than at end-FY2013. For the full year, order inflows are down 11% y-o-y (domestic power down 25% y-o-y, others, i.e. industrial, spares and international, up 23% y-o-y).
Revise estimates on weak sectoral outlook and operational traction We revise our estimates to
R10 and R10.5 for FY15e (estimates) and FY2016e from R10.4 and R11.4, respectively, and retain our target price of R110. Reiterate Sell with potential earnings pressure on inadequate backlog, slower execution and margin pressures. Order inflow activity is constrained by overcapacity in power generation, sectoral issues (fuel supply, still inefficient distribution infra- structure) as well as strong competition. Further, negative surprise may originate from Pay Commission-related large fixed cost increase from Jan 1, 2017, which can consume a large proportion of potential steady-state Ebitda.