BHEL’s Q3 numbers had slightly better-than-expected execution but order inflow and backlog continued to belie weakness. Raw material (RM) to sales at 64.6% remains higher than our FY19e estimate of ~59%. Order backlog of R940 bn is inadequate to drive revenues much ahead of CSe of ~R330 bn in FY18e. >20% of order book is not likely to start near-term. Another ~20% (Yadadri) is still expecting clearances. Total executable book is lower as we expect that R210 bn of projects may not get cleared for execution near-term.
The conversion of L1 is taking time and there have been large dropouts (Pudimadaka and Barethi). To us, Bhusawal and Panki also look difficult near-term. Pipeline beyond current L1 seemed thin with few distant opportunities. Working capital reduction is marginal.
Retain Underperform given cautious view on ordering, competition, profitability and employee costs. Long streak of weak RoE (5%) keeps us cautious in spite of low valuation.
Q3: Slower execution q-o-q; RM pressure continues
BHEL’s Q3 execution was up 18% y-o-y, reflecting continued strong execution on a very shallow book. RM cost to sales ratio at 64.6% (though lower 130 bp y-o-y) was still higher than our full-year estimate of 61% for FY18e. Like earlier quarters, Ebitda margin was supported by control on other expenses. Order inflows were weak at R16 bn, thus taking 9M inflows to R68 bn (vs 9M FY16 inflows of R281 bn). Working capital remains high with total receivables at R352 bn.
Order inflows weak; L1 also seeing drops
Weak order inflows is a reflection of sector weakness where clients are moving extremely slow on new projects. NTPC has cancelled the Barethi project and another large project Pudimadaka could move the same way. Total executable book stands at R590 bn (including the R40 bn Bhadradari project). Two potential additions to this list include Yadadari (environmental clearance awaited) and Bangladesh Maitree projects.
L1 conversion to take time; pipeline beyond that is thin
L1 book now stands at 5-6 GW, and the visibility of orders beyond that is low. Emission norms related ordering is likely to be staggered and will see strong competition.