Executable order book growth comes as boost

By: |
New Delhi | Published: June 26, 2018 1:38:07 AM

BHEL trades at 14.2x FY20F P/E; upgrade to Neutral and cut TP to Rs 86

Executable order backlog up 50% y-o-y as of Mar-2018.

BHEL has fallen ~20% YTD despite strong order inflows in FY18. While the order inflow strength is not sustainable as state discoms’ financial health remains weak and overall power capacity utilisation in the country is still low at 61% (as of FY18), we believe BHEL might witness modest growth and profitability recovery as its executable orderbook has improved.

The executable order backlog for BHEL has jumped 50% over FY17-18, while overall order backlog was up only 12.3%. This can drive 18.6% revenue CAGR over FY18-20F on our estimates vs. a decline earlier.Most of the recent orders for BHEL were on a nomination basis; together with bulk of bad debts and contractual obligations provisioning behind it, this can drive Ebitda margins recovery from 4.7% in FY18 to 7% by FY20F. BHEL has ~Rs 120 bn of cash & cash equivalents and Rs 355 bn of debtors as of Mar-18, which is 1.7x current market cap. However, there is uncertainty regarding cash usage and receivables recovery. Our DCF-based valuation assumes that the cash balance is paid out to shareholders in Mar-19. However, realistically, this may be spread over a period of 2-5 years, if at all, which may impact our fair value negatively.

BHEL trades at 14.2x FY20F P/E; upgrade to Neutral and cut TP to Rs 86

We now value BHEL using DCF (Ke: 14%, g: 4%) to arrive at our new TP of Rs 86 (Rs 96 previously, which was based on 1x FY19F P/BV), while our earnings estimates are up 4-13% over FY19-20F. Given the various scenarios regarding use of cash and realisation of stuck receivables, we believe DCF is more suited to value BHEL at this juncture. Our TP implies 13% upside from current levels. L&T and Cummins India are our Buys in this space. Risks: improvement in state discoms’ financial health and favourable settlement of receivables.

Executable order backlog up 50% y-o-y as of Mar-2018

During FY18, BHEL had a good order inflow of Rs 409 bn (up 74% y-o-y) led by a couple of large order wins. This led to overall order backlog increase of 12% y-o-y. However, as per the management commentary, the executable order backlog for BHEL is up 50% y-o-y from Rs 656.66 bn in Mar-2017 to Rs 986 bn in Mar-2018. We believe the rise in executable order backlog for BHEL bodes well for revenue growth in FY19F and FY20F, though longer-term concerns on sustainability of order inflows remain.

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