1. Bhel rating Underweight; Stuck on execution

Bhel rating Underweight; Stuck on execution

Nearly a third of projects in order backlog are either slow moving or non-moving

Updated: February 23, 2015 1:40 AM

The December quarter was extremely weak. Bhel reported revenue of R61 bn (-28% year-on-year), Ebitda margin of 4.7% (down 700 basis point) and profit after tax of R2.13 bn (-70% y-o-y), less than half of the consensus expectation. Roughly 15GW of projects under execution (out of 50GW total) in order backlog with a value of R240 bn (or 23% of OB) are either slow moving or non-moving, as per management, resulting in severe execution challenges.

Bhel expects these headwinds to abate after the captive coal block auctions next fiscal, but in our assessment a sudden shift in growth gears could prove challenging. The management expected a 15GW India market in FY15, of which as of Q3 only 7GW has been finalised, of which Bhel has won 3.8GW. The required ask over the few remaining weeks in the fiscal is very high and a deferral of order prospects is likely. We cut our FY15 and FY16 EPS (earnings per share) estimates by 27% and 13%, respectively. Our new March-16 DCF(discounted cash flow)-based PT (price target) of R200 implies 25% downside. A return of private sector capex in greenfield power projects earlier than expected is a key
upside risk. We maintain UW (underweight.)


Risk of deferral of inflows: Bhel reported R207 bn of inflows in 9M (month) FY15. Assuming in the March quarter all R80-90 bn projects where it is L1 (lowest bidder) materialise (a tough ask) and 1080MW Manguru (Telangana) order flows, it could achieve our FY15 inflow estimate of R350 bn. On the remaining Telangana orders (4.1GW) the process to finalise land and clearances is ongoing. The management expects FY16 market size to be similar to FY15’s (12-13GW).


Bright spots in December quarter results, but how bright are these really? (i) RM (raw material)/sales in December quarter was 54%, almost 300bp lower, but this was when a large chunk of slow-moving jobs was not contributing to revenue. Gross margin gains may not prove sticky once these slow-moving projects resume execution and EPC (engineering, procurement and construction) turnkey jobs booked of late (with significant civil construction and BOP—balance of plant—component involving bought outs and subcontracting) contribute to the top line.
(ii) Gross receivables have decreased from R427 bn to R411 bn so far this fiscal. This is not good considering that 9MFY15 sales fell by R64 bn to R172 bn. (iii) Employee count in 9M FY15 decreased (natural attrition and superannuation) by 2,200 to 45,326. This works well for Bhel in the lean phase; 9M FY15 employee costs were almost flat.

By JP Morgan

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