BHEL’s Q3 numbers had slightly better-than-expected execution but order inflow and backlog continued to belie weakness. Raw material (RM) to sales at 64.6% remains higher than FY19e estimate of 59%. Order backlog of Rs 940 bn is inadequate to drive revenues much ahead of Credit Suiz estimates (CSe) of Rs 330 bn in FY18e. More than 20% of order book is not likely to start near-term. Another 20% (Yadadri) is still expecting clearances. Total executable book is lower as we expect that R210 bn of projects may not get cleared for execution near-term.
The conversion of L1 is taking time and there have been large dropouts (Pudimadaka and Barethi). Bhusawal and Panki also look difficult near-term. Pipeline beyond current L1 seemed thin with few distant opportunities. Working capital reduction is marginal. Retain Underperform given cautious view on ordering, competition, profitability and employee costs. Long streak of weak RoE (5%) keeps us cautious in spite of low valuation.
Q3: Slower execution q-o-q; RM pressure continues
BHEL’s Q3 execution was up 18% y-o-y, reflecting continued strong execution on a very shallow book. RM cost to sales ratio at 64.6% (though lower 130 bp y-o-y) was still higher than full-year estimate of 61% for FY18e. Like earlier quarters, Ebitda margin was supported by control on other expenses. Order inflows were weak at Rs 16 bn, thus taking 9M inflows to Rs 68 bn (vs 9M FY16 inflows of Rs 281 bn). Working capital remains high with total receivables at Rs 352 bn.
Order inflows weak; L1 also seeing drops
Weak order inflows is a reflection of sector weakness where clients are moving extremely slow on new projects. NTPC has cancelled the Barethi project and another large project Pudimadaka could move the same way. Total executable book stands at Rs 590 bn (including the Rs 40 bn Bhadradari project). Two potential additions to this list include Yadadari (environmental clearance awaited) and Bangladesh Maitree projects.
L1 conversion to take time; pipeline beyond that is thin
L1 book now stands at 5-6 GW, and the visibility of orders beyond that is low. Emission norms related ordering is likely to be staggered and will see strong competition.
The conversion of L1 is taking time and there have been large dropouts (Pudimadaka and Barethi). Bhusawal and Panki also look difficult near-term. Pipeline beyond current L1 seemed thin with few distant opportunities. Working capital reduction is marginal. Retain Underperform given cautious view on ordering, competition, profitability and employee costs. Long streak of weak RoE (5%) keeps us cautious in spite of low valuation.
Q3: Slower execution q-o-q; RM pressure continues
BHEL’s Q3 execution was up 18% y-o-y, reflecting continued strong execution on a very shallow book. RM cost to sales ratio at 64.6% (though lower 130 bp y-o-y) was still higher than full-year estimate of 61% for FY18e. Like earlier quarters, Ebitda margin was supported by control on other expenses. Order inflows were weak at Rs 16 bn, thus taking 9M inflows to Rs 68 bn (vs 9M FY16 inflows of Rs 281 bn). Working capital remains high with total receivables at Rs 352 bn.
Order inflows weak; L1 also seeing drops
Weak order inflows is a reflection of sector weakness where clients are moving extremely slow on new projects. NTPC has cancelled the Barethi project and another large project Pudimadaka could move the same way. Total executable book stands at Rs 590 bn (including the Rs 40 bn Bhadradari project). Two potential additions to this list include Yadadari (environmental clearance awaited) and Bangladesh Maitree projects.
L1 conversion to take time; pipeline beyond that is thin
L1 book now stands at 5-6 GW, and the visibility of orders beyond that is low. Emission norms related ordering is likely to be staggered and will see strong competition.
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