Receivables moderate QoQ, but remain elevated; recovery not in sight

·         BHEL reported a disappointing 4QFY21 earnings as revenue came in 29% below our estimate. Higher fixed cost dented operating performance, with the operating loss attributable to under-absorption of costs. The company is yet to show a significant improvement in pending receivables, with total debtors at INR313b in FY21 (v/s INR348b in 9MFY21 and INR354b at the end of FY20). In spite of the management’s ongoing efforts, we expect receivables to remain elevated in the near future. Order inflows remained weak, with a 31%/43% YoY decline in 4Q/FY21.

·         We now estimate FY22E to be loss making and reduce our FY23E EPS estimate by 36%. While orders are few and far between, the pricing environment remains highly competitive, limiting scope for margin expansion. On its ongoing diversification strategy, the company has won its first order for a sulfur recovery unit (SRU) for IOCL Panipat and is restructuring its Solar business division. Any material financial impact is still a long time away. We maintain our Sell rating, and change our valuation methodology to EV/EBITDA basis (from P/E earlier), with a TP of INR40/share (12x FY23E EV/EBITDA).

Operating performance disappoints

·         4QFY21 earnings summary: Revenue stood at INR71.7b, up 42% YoY (29% below our estimate). Gross margin increased 220bp YoY, but moderated sequentially (-190bp QoQ). The operating loss widened to INR12.6b (v/s a loss of INR5.6b YoY). Employee cost rose 11% YoY to INR12.3b, while other expenses increased sharply to INR22.6b (31.5% of sales v/s 18% in 4QFY21). Losses stood at INR10.3b (v/s our profit estimate of INR8.2b).

·         FY21 snapshot: Revenue fell 19% YoY to INR173b. Gross margin declined by 140bp YoY to 33.1%. Employee costs stood flat YoY and formed 31% of sales (v/s 25% in FY20). Other expenses rose 55% YoY. Operating losses stood at INR31.3b (v/s INR2.3b YoY). Adjusted loss stood at INR27.2b (v/s INR14.7b YoY). CFO stood at INR5.6b (v/s -INR28.9b in FY20).

·         Segmental highlights: a) Power: Revenue rose 51% YoY to INR47.9b in 4QFY21. Operating loss stood at INR4.2b (v/s break-even YoY). b) Industry: Revenue grew 38% YoY to INR19.6b in 4QFY21. Operating loss stood at INR3.9b (v/s loss of INR3.7b YoY).

·         Order book declined 6% YoY to INR1,021b, with order book-to-revenue ratio ~6x. Segment-wise order book is as follows: Power – INR842b, Industry – INR113b, and international orders – INR66b. 

·         Order inflows stood ~INR44b in 4QFY21 (Power/Industry: INR27.2b/INR16.7b.

Highlights from the management commentary

·         BHEL is favorably placed in: a) 2*660MW NTPC Talcher main plant package, b) Steam generators (700MW, 12 units) for nuclear power plants based on PHWR technology, c) a number of FGD, boiler modifications, and emission control orders.

·         It is L1 in NPCIL tender for 6*700 MW Turbine Island package (~INR108b).

·         Other prominent orders in the Industry segment include supply of spacecraft propellant tank parts for Chandrayaan-3 from ISRO, NALCO 1*18.5MW Steam turbo generator, EPC 75 sets of Propulsion for AC MEMUs, and 87 sets of IGBT (insulated gate bipolar transistors) based propulsion equipment.

·         BHEL has invested ~INR7.3b on R&D in FY21 (~4.5% of sales) and filed 526 patents and copyrights.

·         Of the total receivables, 13%/43%/36%/8% are from the private sector/state entities/Center/exports.

Valuation and view

·         BHEL continues to struggle with: a) a weak ordering environment in the Power sector, b) high receivables (~INR313b), and c) huge FY21 employee cost (~31% of sales). In FY21, working capital stood elevated ~101% of sales (99%/63% of sales FY20/FY19), weighed by a higher inventory and receivables and poor execution.

·         We now estimate FY22E to be loss making and reduce our FY23E EPS estimate by 36%. While orders are few and far between, the pricing environment remains highly competitive, limiting scope for margin expansion. On its ongoing diversification strategy, the company has won its first order for an SRU for IOCL Panipat and is restructuring its Solar business division. Any material financial impact is still a long time away. We maintain our Sell rating, and change our valuation methodology to EV/EBITDA basis (from P/E earlier), with a TP of INR40/share (12x FY23E EV/EBITDA).