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Spark Capital: BHEL 3QFY13 Results Review - Growth and margin prospects to weaken further, Maintain Sell




Spark Capital Advisors(India) Private Limited


04 Feb 2013





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Growth and margin prospects to weaken further, Maintain Sell BHEL reported muted 3QFY13 revenue of Rs. 102.2bn (4.1% de-growth) with an EBITDA margin of 16.0%. PAT stood at Rs. 11.8bn, a de-growth of 17.5% yoy. Weak execution pace was due to a combination of client side delays in the power segment and weak industrial demand across sectors. Order book de-grew by 22% to Rs. 1.13tn with order inflow remaining tepid at Rs. 19.4bn. While the management remains confident of securing sizeable orders from projects with order potential of ~13GW in total (to be tendered in the near term), risks of delays in ordering remains high as clearance and land acquisition issues keep ordering award pace uncertain. Keeping in mind the NTPC bulk tender and RRVUNL orders, we expect BHEL to register an order inflow of Rs. 260bn and Rs. 448bn in FY13E and FY14E respectively. We expect EBITDA margin to further contract (by 130bps in FY14E) due to the relatively lower margin profile of the new orders which have been secured in a highly competitive market. Given weakening order book, poor order inflow outlook, execution delays and contracting margins, we expect revenue to de-grow by 3% and 6% in FY13E and FY14E respectively. Consequently, PAT is expected to de-grow by 20% and 17% yoy in FY13E and FY14E. Considering the multiple headwinds expected to be faced by BHEL, we maintain our ‘Sell’ rating with a target price of Rs. 190. Highlights of the quarter’s performance and outlook Order book position weakens further – Order book at the end of 3QFY13 stood at Rs. 1.13tn (22% yoy de-growth) with an order inflow of Rs. 19.4bn. While the management is confident of securing orders from 5-6 projects – Orissa, Madhya Pradesh, RRVUNL, NTPC – expected to be tendered in the near term, we expect risk of ordering delays and intense competition to keep order inflow potential hazy. Similarly, lack of traction in industrial capex is expected to keep industrial orders capped going forward as well. Execution issues prevail across segments – Revenue growth for BHEL which had started to weaken over the past 2-3 quarters slowed further in 3QFY13 due to execution issues faced in both power and industry segments. Both industry and power segments de-grew by 4.6% and 5.5% respectively. We expect the pace of execution to remain muted and expect the company to register a revenue de-growth of 3% and 6% in FY13E and FY14E respectively Forex gain boosts other income – Other income of Rs. 3.3bn was higher than expected due to a forex gain of Rs. 1.8bn during the quarter. We expect other income to decrease by 20% in FY14E due to the depleting cash levels which currently stands at ~Rs. 35bn (vs. Rs. 53bn in 2HFY13)

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