4QFY13 Result Update

Institutional Equities

Bharat Heavy Electricals

24 May 2013
Reuters: BHEL.BO; Bloomberg: BHEL IN

SELL

Earnings Contraction To Cap Valuation

Bharat Heavy Electricals (BHEL) posted 4QFY13 revenue of Rs188.5bn, a 2.2%
YoY fall, owing to lower execution traction from declining order backlog. Higher
other expenses, up by 21.6% YoY, due to rising provisions for contractual
obligations negated 140bps YoY savings in raw material consumption leading to
6.7% decline in EBITDA to Rs42.9bn. Consequently, PAT fell 4.2% YoY to
Rs32.3bn, partly impacted by higher depreciation and lower other income. The
performance was broadly in-line with the provisional results released in April
2013. We believe the pace of execution would falter further over FY13-FY15E due
to declining order book, while the margins would be under pressure due to
severe price under-cutting to secure new orders. We retain our Sell rating on
BHEL with a revised target price of Rs165 (Rs170 earlier), based on 8xFY15E
EPS, as we roll forward our valuation to FY15E.
FY14 order inflow to be crucial: BHEL reported order intake of Rs315bn in FY13, up
42.5% YoY albeit on a low base of FY12 order intake of Rs221bn (see Exhibit 4). BHEL
is entering FY14 with only two L1 projects in hand NTPCs Darlipalli and Unchachar
projects while the upcoming projects for bidding (see Exhibit 7) is unlikely to suffice
for BHEL considering its large scale of operations, even if we assume that it achieves
50% share. We have retained our FY14E order inflow assumption of Rs350bn.
Revenue growth to falter, compression in margins likely: The order backlog of
BHEL fell 14.4% YoY to Rs1,152bn leading to a decline in its revenue visibility to
2.4xFY13 revenue compared to 2.8x at the beginning of the year. Consequently, we
expect BHEL to report a 5.6% CAGR decline in revenue over FY13-FY15E compared
to a 7.2% CAGR rise reported over FY11-FY13. Also, rising pricing pressure in the
BTG industry owing to the dual impact of oversupply and weak demand would lead to a
fall in its operating margin by 150bps/110bps YoY in FY14E/FY15E, respectively.
Pressure on working capital rises: Despite only a 1% increase in revenue growth in
FY13, the ex-cash net working capital of BHEL rose 24.7% YoY due to rise in debtors
(up by 10.6% YoY to Rs294bn) and lower advances from customers. As a % of sales,
the ex-cash net working capital increased 660bps YoY to 34.8% in FY13.
Outlook: BHEL is unlikely to sustain its revenue growth traction on such a high base,
considering the subdued order placement activity and distorted demand-supply
dynamics in the BTG industry along with absence of similar level of scalability options
in its other business segments. Also, compression in margins is likely to lead to
earnings CAGR decline of 13.2% over FY13-FY15E compared to a 5.2% CAGR rise
reported over FY11-FY13, thereby capping its valuation. We have retained our
negative outlook and Sell rating on BHEL with a revised target price of Rs165 (Rs170
earlier) based on 8xFY15E EPS.
Y/E March (Rsmn) - standalone
4QFY12
3QFY13
Net revenue
192,644
100,417
Raw material costs
111,350
57,364
Staff costs
14,777
14,373
Other expenses
20,439
14,119
Total expenditure
146,566
85,857
EBITDA
46,078
14,560
OPM (%)
23.9
14.5
Depreciation
2,541
2,198
Interest costs
183
509
Other income
7,283
5,104
PBT
50,637
16,957
Tax
16,838
5,139
Net profit
33,798
11,819
NPM (%)
17.5
11.8
EPS (Rs)
13.8
4.8
Source: Company, Nirmal Bang Institutional Equities Research

4QFY13
188,502
106,290
14,391
24,850
145,532
42,970
22.8
2,889
405
6,466
46,142
13,766
32,375
17.2
13.2

% Chg (YoY)
(2.2)
(4.5)
(2.6)
21.6
(0.7)
(6.7)
13.7
121.0
(11.2)
(8.9)
(18.2)
(4.2)
(4.2)

Sector: Capital Goods

CMP: Rs196
Target Price: Rs165
Downside: 16%
Chirag Muchhala
chirag.muchhala@nirmalbang.com
+91-22-3926 8092
Key Data
Current Shares O/S (mn)

2,447.6

Mkt Cap (Rsbn/US$bn)

479/8.6

52 Wk H / L (Rs)

272/174

Daily Vol. (3M NSE Avg.)

3,402,859

Price Performance (%)

1M

6M

1 Yr

BHEL

3.7

(12.9)

(5.9)

Nifty Index
Source: Bloomberg

2.2

6.1

23.4

% Chg (QoQ)
87.7
85.3
0.1
76.0
69.5
195.1
31.4
(20.4)
26.7
172.1
167.9
173.9
173.9

Please refer to the disclaimer towards the end of the document.

FY12
472,279
274,167
54,654
52,088
380,909
91,370
19.3
8,000
513
20,166
103,023
32,623
70,400
14.9
28.8

FY13
476,177
273,558
57,528
59,267
390,353
85,824
18.0
9,534
1,253
19,287
94,324
28,177
66,147
13.9
27.0

% Chg (YoY)
0.8
(0.2)
5.3
13.8
2.5
(6.1)
19.2
144.3
(4.4)
(8.4)
(13.6)
(6.0)
(6.0)

Institutional Equities
Exhibit 1: Financial summary (consolidated)
Y/E March (Rsmn)
Net revenue
EBITDA
Net profit
EPS (Rs)
EPS growth (%)
EBITDA margin (%)
PER (x)
P/BV (x)
Dividend yield (%)
RoCE (%)
RoE (%)

FY11
418,547
79,499
60,534
24.7
40.4
19.0
7.9
2.4
3.7
40.7
33.6

FY12
475,990
91,951
70,873
29.0
17.1
19.3
6.8
1.9
3.8
36.4
31.1

FY13
481,063
86,731
66,934
27.3
(5.6)
18.0
7.2
1.6
2.8
27.2
23.9

FY14E
443,526
73,013
55,786
22.8
(16.7)
16.5
8.6
1.4
2.6
19.1
17.1

FY15E
428,313
66,103
50,463
20.6
(9.5)
15.4
9.5
1.2
2.0
14.8
13.8

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 2: Segmental snapshot (standalone)

Y/E March
Revenue (Rsmn)
Power
Industry
Revenue mix (%)
Power
Industry
EBIT (Rsmn)
Power
Industry
EBIT margin (%)
Power
Industry

4QFY12

3QFY13

4QFY13

YoY (%)

QoQ (%)

FY12

FY13

YoY (%)

155,738
46,789

83,075
22,365

155,392
43,409

(0.2)
(7.2)

87.0
94.1

378,629
116,589

395,767
106,040

4.5
(9.0)

76.9
23.1

78.8
21.2

78.2
21.8

76.5
23.5

78.9
21.1

42,601
14,201

15,224
4,088

40,616
9,363

(4.7)
(34.1)

166.8
129.0

81,838
33,424

85,595
21,966

4.6
(34.3)

27.4
30.4

18.3
18.3

26.1
21.6

21.6
28.7

21.6
20.7

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 3: Quarterly order book position

(Rsbn)
300

(Rsbn)
1,800

250

1,600
1,400

200

1,200

150

1,000

Order intake
tapers off

100

800

Order intake (LHS)

4QFY13

3QFY13

2QFY13

1QFY13

4QFY12

3QFY12

2QFY12

1QFY12

4QFY11

3QFY11

2QFY11

1QFY11

4QFY10

400
3QFY10

2QFY10

600
1QFY10

50

Order backlog (RHS)

Source: Company, Nirmal Bang Institutional Equities Research

Bharat Heavy Electricals

Institutional Equities
Exhibit 4: Annual order intake trend
(Rsbn)

(Rsbn)

700

1,800
591

600

605

590

1,600

519

1,400

500

1,200
362

400

300
200

1,000

315

800

221

189

600
400

100

200

FY06

FY07

FY08

FY09

FY10

Order intake (LHS)

FY11

FY12

FY13

Order backlog (RHS)

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 5: Key order wins in FY13

Project
Gadarwara
Suratgarh
IB Valley
Nabinagar
Raghunathpur
Vindhyanchal
Rawatbhata

Developer

Unit size (MW)

Scope

Likely value (Rsbn)

NTPC (Bulk tender 2)

RRVUNL
OPGC
NTPC (Bulk tender 1)
DVC (Bulk tender 1)
NTPC
NPCIL

2x800
2x660
2x660
3x660
2x660
1x500
2x700

BTG
EPC
BTG
Boiler
Turbine
BTG
Turbine

40.6
56.0
34.0
28.5
15.7
11.4
12.1

Developer

Unit size (MW)

Scope

Likely value (Rsbn)

NTPC (Bulk tender 2)

NTPC

2x800
1x500

Boiler
EPC

25.4
22.0

Source: Company, Nirmal Bang Institutional Equities Research

Exhibit 6: L1 projects
Project
Darlipalli
Unchachar

Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 7: Upcoming projects for bidding in FY14

Project
Bhusawal
Nashik
Khandwa
Khargaon
Tanda
Ennore
Udangudi
Wanakbori
Ghatampur
Surajpur

State
Maharashtra
Maharashtra
Madhya Pradesh
Madhya Pradesh
Uttar Pradesh
Tamil Nadu
Tamil Nadu
Gujarat
Uttar Pradesh
Chhattisgarh

Developer
Maharashtra SEB
Maharashtra SEB
Madhya Pradesh SEB
NTPC
NTPC
Tamil Nadu SEB
Tamil Nadu SEB
Gujarat SEB
Neyveli Lignite
IFFCO

Unit size (MW)

1x660
1x660
2x660
2x660
2x660
1x660
2x660
1x800
3x660
2x660

Scope
EPC
BTG
EPC
EPC
BTG
EPC
EPC
EPC
EPC
BTG

Source: Industry, Nirmal Bang Institutional Equities Research

Bharat Heavy Electricals

Institutional Equities
Rating track
Date

Rating

Market price (Rs)

Target price (Rs)

Buy

281

327

30 January 2012

Buy

274

327

4 April 2012

Hold

264

286

13 April 2012

Hold

257

286

24 May 2012

Hold

209

221

27 July 2012

Hold

212

221

20 September 2012

Hold

216

221

4 October 2012

Sell

249

221

30 October 2012

Sell

227

221

7 January 2013

Sell

242

221

4 February 2013

Sell

225

215

26 March 2013

Sell

180

170

8 April 2013

Sell

183

170

9 April 2013

Sell

182

170

27 January 2012

Bharat Heavy Electricals

Institutional Equities
Disclaimer
Stock Ratings Absolute Returns
BUY > 15%
HOLD 0-15%
SELL < 0%
This report is published by Nirmal Bangs Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by
Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient
and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the
clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.
We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical
information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be
subject to change from time to time without notice.
Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this
material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons
including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s
from any inadvertent error in the information contained, views and opinions expressed in this publication.

Access our reports on Bloomberg Type NBIE <GO>

Team Details:
Name

Email Id

Direct Line

Rahul Arora

CEO

rahul.arora@nirmalbang.com

+91 22 3926 8098 / 99

Hemindra Hazari

Head of Research

hemindra.hazari@nirmalbang.com

Neha Grover

AVP Sales

neha.grover@nirmalbang.com

+91 22 3926 8093

Ravi Jagtiani

Dealing Desk

ravi.jagtiani@nirmalbang.com

+91 22 3926 8230, +91 22 6636 8833

Sudhindar Rao

Dealing Desk

sudhindar.rao@nirmalbang.com

+91 22 3926 8229, +91 22 6636 8832

Pradeep Kasat

Dealing Desk

pradeep.kasat@nirmalbang.com

+91 22 3926 8100/8101, +91 22 6636 8831

Michael Pillai

Dealing Desk

michael.pillai@nirmalbang.com

+91 22 3926 8102/8103, +91 22 6636 8830

+91 22 3926 8017 / 18

Sales and Dealing:

Nirmal Bang Equities Pvt. Ltd.

Correspondence Address
B-2, 301/302, Marathon Innova,
Nr. Peninsula Corporate Park
Lower Parel (W), Mumbai-400013.
Board No. : 91 22 3926 8000/1
Fax. : 022 3926 8010

Bharat Heavy Electricals