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Bharat Heavy Electricals Rating: add- Q4 performance beat estimates

Outlook for thermal capacity a positive; FY23/24e EPS up 290/78%; target price raised to Rs 59; upgraded to ‘Add’

Adjusted-PAT stood at Rs 9 bn, as against loss of Rs 10 bn in Q4FY21.
Adjusted-PAT stood at Rs 9 bn, as against loss of Rs 10 bn in Q4FY21.

Bharat Heavy Electricals’ (BHEL’s) Q4FY22 performance was ahead of our estimates as revenues grew 12.4% y-o-y to Rs 81 bn led by 24% y-o-y growth in power segment. Raw material cost to sales remained elevated at 72% due to increase in commodity prices, impacting the gross margin. However, tight control on other expenditure (5.5% vs 7% in Q4FY21), net provision withdrawal of Rs 8.4 bn and ERV gain of Rs 0.9 bn helped turn EBITDA to a positive Rs 11.5 bn against a loss of Rs12.6 bn in Q4FY21. Order intake remained muted at Rs 43 bn, down 2% y-o-y, taking the current orderbook to1 trn (4.8x TTM sales).

Given the ongoing energy crisis, management indicated improvement in prospects for coal-based power plants with an enquiry pipeline of 7.7GW (approx. value of Rs 700 bn+ as per our estimates). We are keenly monitoring pick-up in FGD tendering for non-NTPC coal plants. We expect pace of execution in the industry segment to accelerate due to increasing backlog and short-cycle nature of orders. Upgrading from Sell to Add with a revised target price of Rs 59 (previously: `45).

Healthy execution; margins improved with provision withdrawal: In Q4FY22, the company reported a healthy 12% y-o-y growth in revenues, marginally ahead of our estimate. Power segment revenues grew 24% y-o-y to `59 bn while industrial segment declined 15% y-o-y to Rs 17 bn. High raw material costs, at 72% of sales, impacted the gross margin. However, a net provision write-back of Rs 8.4 bn and ERV gain of Rs 0.9 bn resulted in a positive EBITDA of Rs 11.5 bn. Adjusted-PAT stood at Rs 9 bn, as against loss of Rs 10 bn in Q4FY21.

Few large order wins; keenly watching for green shoots: Order inflow in Q4FY22 declined 2% y-o-y to Rs 43 bn. For FY22, order inflow stood at Rs 236.9 bn, up 76% y-o-y, including an EPC order from NPCIL for supplying turbine islands package for 6x 700MWe PHWR and FGD package. With the enquiry pipeline healthy at 7.7GW, we expect revival in order intake and pick-up in FGD ordering, especially from states and private sector.

Marginal increase in receivables: Debtors dues increased by Rs 1.9 bn from Mar’21 levels and overall debtors stood at ~Rs 332 bn, despite 24% y-o-y increase
in sales in FY22. Trade receivables breakup is: 41%/36%/14%/8% from states / Central PSUs /private/ international entities.

Upgrade to ADD: Given the ongoing energy crisis and muted coal-based capacity addition in the past, management indicated improving prospects for coal-based power plants. We expect FGD orders to ramp up in the near term. We believe, with domestic thrust towards manufacturing and the company’s efforts towards improving its balance sheet, BHEL can revive given its strong technical track record. Company is taking cost-control measures and working on reducing receivables, resulting in improving cashflows. Given the improving order outlook and balance sheet, we revise our FY23E and FY24E earnings by 290% and 78%, respectively. We upgrade our rating to Add on: a) improved tendering in thermal capacity and FGD, b) realisation of receivables, and c) margin improvement on lowering of raw material costs.

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