Some relief on orders but pricing still a concern. BHELs 3Q FY14 order inflow of R7,200 crore was up 2.6x y-o-y from a low base, as it received orders from the power sector. The low pricing at which these orders are won is a concern to us. In the first nine months of FY14, the company had won orders worth R11,700 crore, up 9% y-o-y, with a 68% contribution from the power segment. No pick-up in execution. Against managements expectation of a pick-up in execution in H2, we saw Q3 FY14 revenue fall by 15.5% y-o-y to R8,630 crore; this was 9% below our forecast. The main reason was a weak financial situation at some of its customers. Also, slow-moving orders, largely from the power sector, represent about 20% of BHELs end-Q3 FY14 order backlog. Ebitda margin continued to contract.
We reaffirm our underperform rating on BHEL, as we believe the demand outlook remains challenging and competition for a limited number of orders will remain fierce. Also, risks persist to its execution and receivables (with over 50% of the latter due over 1 year). We raise our six-month target price to R137 (from R115), now based on a target PER of 10x (formerly 8x), at a 40% discount to its past-10-year average, as we see a slight improvement in visibility in the order inflow, applied to our new FY15E EPS. The main risk would be a better-than-expected order inflow over FY15.