We reiterate ‘sell’ rating on * Bharat Heavy Electricals and revise our estimates to R10 and R10.5 for FY15e and FY16e from R10.4 and 11.4, respectively, and retain our target price of R110 due to sedate ordering activity amid strong competition, downside risk from revenue and margin trajectory, and impending pay commission-related cost escalation.
Order inflow activity is constrained by overcapacity in power generation, sectoral issues (fuel supply, still inefficient distribution infrastructure) as well as strong competition (even though list of competitors seems smaller).
BHEL’s Q4 flash results reflect deteriorating metrics. BHEL reported in-line sales of R15,500 crore. This represents a 22% y-o-y fall against 18% y-o-y fall over nine months of FY14. BHEL commissioned 13.4 GW of power plants for the full year, up 30% y-o-y (including 11.2 GW for utilities). The company’s Q4 PBT at R2,360 crore was significantly lower than our R3,000 crore estimate. Assuming reasonable estimates for other income and depreciation, this implies an ebitda margin of 15.3% in Q4 versus our estimate of 19.6% (down 700 bps y-o-y versus 600 bps y-o-y fall in Q3). Year-on-year results are not comparable this year because of BHPV merger. PAT at R1,600 crore fell 50% y-o-y (similar decline in full-year PAT). We note ~2-2.5% average revision in annual PBT results (actual versus flash) over the past seven years, suggesting a larger impact at a quarterly level.