bhel q1fy15: buy - motilal oswal
TRANSCRIPT
12 August 2014
1QFY15 Results Update | Sector: Capital Goods
BHEL
Satyam Agarwal ([email protected]); +91 22 3982 5410
Amit Shah ([email protected]) / Nirav Vasa ([email protected])
BSE SENSEX S&P CNX CMP: INR224 TP: INR300 Buy 25,881 7,727
Bloomberg BHEL IN
Equity Shares (m) 2,447.6
M.Cap. (INR b) / (USD b) 547.5/9
52-Week Range (INR) 292/100
1, 6, 12 Rel. Per (%) -3/16/50
Financials & Valuation (INR Million)
Y/E Mar 2015E 2016E 2017E
Net Sales 323,738 356,813 397,098
EBITDA 36,228 49,603 62,823
Adj PAT 24,587 37,321 48,362
EPS (INR) 10.0 15.2 19.8
Gr. (%) -32 52 30
BV/Sh(INR) 142 151 164
RoE (%) 7.3 10.4 12.5
RoCE (%) 7.3 10.2 12.4
P/E (x) 22.3 14.7 11.3
P/BV (x) 1.6 1.5 1.4
1QFY15 operational performance better than estimates 1QFY15 operational performance was better than estimates with Revenues at
INR51b (down 21% YoY, 8% below est) and EBIDTA margins at 4.3% (down 180bp YoY, vs est of 2.9%). PAT at INR 1.9b, down 58% YoY, was higher than estimates of INR762m (down 58%) and is supported by other income at INR3.5b / lower tax rates at 21% (given R&D benefits).
BTB remains steady 2.5x: election impasse impacts 1QFY15 order finalization Power segment BTB stood at 2.5x in 1QFY15 (from lows of 2.3x in Sept 13); we
expect bounce back to 3.0x in FY15. We believe that improvement in BTB is an all important trend, and has ramifications on several cyclical components. Rising trend in debtors had been arrested (down 6% QoQ).
Order awards in 1QFY15 stood at just INR11b, given the elections. BHEL is favorably positioned in ~4GW of projects. During FY15, expect 16-17GW of project awards (vs 6GW YoY).
Costs supported by cyclical factors; expect retirements at ~2,200 in FY15 Net provisions in 1QFY15 stood at just INR510m (vs INR2.4b YoY) and thus SGA
expenses have been curtailed. Provisions / LDs accounted for 7.5% of revenues in FY14 vs 4.0% in FY13; and with improved liquidity / accelerated execution, we expect stabilization in these factors to more normative levels.
Staff cost was up 7% YoY given impact of BHPV merger; expect retirements at 2,200 employees in FY15 (of which 729 have retired in 1QFY15).
Valuations and view We maintain Buy with Price Target of INR300/sh (20x FY16E).
Investors are advised to refer through disclosures made at the end of the Research Report.
12 August 2014 2
BHEL
1QFY15 operational performance better than estimates; supported by cyclical factors BHEL’s 1QFY15 operational performance was better than estimates: Revenues
at INR51b (down 21% YoY, 8% below estimates) and EBIDTA margins at 4.3% (down 180bp YoY, better than estimate of 2.9%). Net Profit at INR1.9b (down 58% YoY) was higher than estimates of INR762m (down 58%) and is supported by other income at INR3.5b / lower tax rates at 21% (given R&D benefits).
Revenues continued to remain impacted given slow moving orders from private sector (at ~18% of the order book), and also delayed execution due to lack of regulatory clearances, local issues, delays in payment / LCs, etc. EBIDTA margins at 4.2% is commendable given the poor fixed cost absorption, with staff costs at 31% (up 780 bps YoY), SGA expenses at 14.8% (vs 14.9% in 1QFY14), and RM costs as % of revenues at 50.4% (down 590bps).
Staff cost stood at INR15.7b in 1QFY15 (up 7% YoY) largely given the impact of BHPV merger in August 2014 (~1,100 employees absorbed by BHEL); and thus adjusted costs are marginally lower YoY. Employee count at the end of 4QFY14 was at 47,525 down by 870 in FY14 (despite addition of 1,100 employees of BHPV). Even in FY15, management expects retirements at 2,200 employees (of which 729 have retired in 1QFY15).
Material costs are also likely to improve given various initiatives like design to cost, improved localization (post completion of one year of operations of the first supercritical unit by end FY15), etc.
Net provisions in 1QFY15 stood at just INR510m (vs INR2.4b YoY) and thus SGA expenses have been curtailed. Importantly, in FY14, provisions stood at INR22.6b (vs INR15.6b in FY13) and also liquidated damages at INR6.3b (vs INR3.5b YoY); thus these factors accounted for 7.5% of revenues in FY14 vs 4.0% YoY. Improved liquidity conditions and accelerated execution will further lead to stabilization in these factors to more normative levels, going forward.
Revenues down 20% YoY given constrained environment
Source: MOSL, Company
EBITDA margins impacted by negative operating leverage
Source: MOSL, Company
58 69 74 141
68 87 93 186
74 108
111
202
87 110
105
199
67 93 89 154
53
29 24 1829
1626 25
3210
24 19 2417
1 -5 -2-2
4 -15
-16
-22
-20
1QFY
102Q
FY10
3QFY
104Q
FY10
1QFY
112Q
FY11
3QFY
114Q
FY11
1QFY
122Q
FY12
3QFY
124Q
FY12
1QFY
132Q
FY13
3QFY
134Q
FY13
1QFY
142Q
FY14
3QFY
144Q
FY14
1QFY
15
Revenues(INR b) Revenue growth (% YoY)
10.4
18.3 21
.6 25.2
15.2 19
.6 23.2
18.9
14.1 16
.0 19.1
25.3
14.2 18
.016
.024
.26.
06.
7 11.4
18.2
4.2
1QFY
102Q
FY10
3QFY
104Q
FY10
1QFY
112Q
FY11
3QFY
114Q
FY11
1QFY
122Q
FY12
3QFY
124Q
FY12
1QFY
132Q
FY13
3QFY
134Q
FY13
1QFY
142Q
FY14
3QFY
144Q
FY14
1QFY
15Adjusted EBITDA margin
12 August 2014 3
BHEL
Segmental performance: Execution remains constrained 1QFY15 Power sector revenues declined 23% YoY at INR41b, while Industry
revenues were down 12% YoY at INR11b. Power sector EBIT margins stood at 12.7% vs 14.1% YoY, while Industry segment EBIT stood at 3.5%, vs 10.1% YoY.
The Industry business has failed to provide support, given the dependence on captive power (50%+ of revenues); also the traction in transportation segment has been much below expectations given the delayed decision making in Railways. Margins have been impacted given the increased revenue contribution from projects.
Also, in the power business, as we understand, the list of slow-moving orders continues to be substantial with 7.5GW of capacity, contributing 18% to BHEL's power sector order book (management stated that slow moving orders stand at INR120b).
BHEL: Segmental performance
INR m FY14 FY15 1Q 2Q 3Q 4Q 1Q Revenues 66,712 93,156 89,195 154,316 52,772 Power 53,786 75,764 73,196 122,108 41,442 Growth (%) (20.5) (15.4) (11.9) (21.4) (23.0) Industry 12,926 17,392 15,999 32,208 11,331
Growth (%) (34.4) (15.4) (28.5) (25.8) (12.3)
EBIT 8,899 10,942 14,402 29,622 5,645 Power 7,589 10,984 12,084 23,354 5,250
Growth (%) (37.1) (37.9) (20.6) (42.5) (30.8) Industry 1,311 -42 2,318 6,268 395
Growth (%) (68.3) (101.0) (43.3) (33.1) (69.9)
EBIT margin (%) 13.3 11.7 16.1 19.2 10.7 Power 14.1 14.5 16.5 19.1 12.7 Industry 10.1 -0.2 14.5 19.5 3.5
Source: Company, MOSL
Slow Moving Orders at 18%+ of power sector order book, focus shifts to public sector for execution Project Customer MW INR B May-09 Korba West Power Co Ltd Avantha 600 12.9 Mar-10 Bela TPP, Maharashtra Ideal Energy 270 7.0 May-09 OPG Power, Gujarat OPG 270 6.8 Jul-09 Malibrahmani, Angul TPP Monnet Power 525 13.2 Mar-10 Surana Power, Raichur TPP Surana Power 420 11.4 Mar-10 Usha Jayaswal TPP Abhijit Group 540 12.7 Mar-11 Indiabulls Nashik - Phase II Indiabulls 1,350 28.9 Mar-11 Indiabulls Amravati - Phase II Indiabulls 1,350 28.9 Sep-10 Raigarh TPP Visa Power 600 13.3 Oct-11 Singrauli Dainik Bhaskar 1,320 37.8 Mar-12 Vizag Abhijeet Projects 300 6.3 Total 7,545 179.1 % of Power sector order book 20
Source: Company, MOSL
12 August 2014 4
BHEL
Order intake muted at INR11b in 1QFY15, expect 16-17GW awards in FY15 The management stated that BHEL is favorably positioned in ~4GW of projects
including: i) 1320MW Ennore SEZ (EPC, INR78b) ii) 6X196MW Pranhita Lift Irrigation (~INR25-30b) iii) 500MW Tuticorin (BTG, INR12b) iv) 1GW of Pakal DUL Hydro power with Patel Engg (~INR90b JV share) v) 4X111MW Vishnugad Pipalkoti Hydro project, etc. Order inflow was impacted by slower decision making process because of elections in 1QFY15.
During FY15, 16-17GW of projects is likely to be awarded, largely from the state sector. Of this, the management stated that NTPC projects awards are likely at 5.5GW (4X660MW Bareithy, 2X660MW Khargone, 2X660MW Katwa), Hydro projects at 2.5GW, etc.
Order backlog at the end of 1QFY15 stood at INR974b, down 10% YoY. Power sector intake in 1QFY15 was just INR3.1b (largely spares) and Industry at INR8.2b (Solar plant EPC, Transformers, Traction Motors, etc).
BTB has witnessed a cyclical uptick to 2.5x in 1QFY15
Source: MOSL, Company
BHEL is favorably positioned in ~4GW projects
Source: MOSL, Company
BHEL is favorably positioned in 4GW capacity, expect industry pipeline at 16-17GW in FY15 (vs 6.2GW awards in FY14) BHEL’s order intake had declined from peak levels of ~INR600b in FY10/FY11 to
average levels of INR270b in FY12/FY13. Thus, FY14 intake at INR280b had remained at similar levels. Our statistical analysis of the macro data-points on demand and supply dynamics in the power sector suggests that the new cycle of powergen capex could commence over the next 12-15 months. 'Timing the recovery' remains the key moving variable. However we believe that what matters is not 'timing the project awards', but the time when markets believe that project awards 'could possibly' commence. And that time is now. (Refer our detailed Thematic - BTG ordering: Emerging from the 'Eclipse', December 2013).
Industry awards in FY14 stood at 6,210MW, and management expects a pipeline of 16-17GW of projects to be awarded in FY15. These are largely from the government sector, and exclude the UMPP projects (bidding undergoing for 2 projects of 8GW capacity).
BTB maintained at 2.5x in 1QFY15: a key trend driving cyclical factors For 1QFY15, BHEL’s BTB stood at 2.5x (from lows of 2.2x in Sept 13). Also, Power
segment BTB had improved to 2.5x in FY14 (from lows of 2.3x in Sept 13); we expect bounce back to 3.0x in FY15.
1,24
01,
258
1,34
01,
438
1,48
01,
540
1,58
01,
641
1,59
61,
610
1,46
51,
347
1,33
01,
223
1,13
71,
152
1,08
61,
023
1,00
61,
016
974
4.2
4.2 4.3
4.2
4.2
4.2
4.1
3.8
3.6
3.5
3.1
2.7
2.6
2.4
2.2
2.3
2.3
2.2
2.2
2.5 2.5
1QFY
102Q
FY10
3QFY
104Q
FY10
1QFY
112Q
FY11
3QFY
114Q
FY11
1QFY
122Q
FY12
3QFY
124Q
FY12
1QFY
132Q
FY13
3QFY
134Q
FY13
1QFY
142Q
FY14
3QFY
144Q
FY14
1QFY
15
Order book (INR b) Book-to-bill ratio ( x TTM)12
880
156
226
108 13
512
823
325
143
68 56 32 2021
015 30 72
163
11
1QFY
102Q
FY10
3QFY
104Q
FY10
1QFY
112Q
FY11
3QFY
114Q
FY11
1QFY
122Q
FY12
3QFY
124Q
FY12
1QFY
132Q
FY13
3QFY
134Q
FY13
1QFY
142Q
FY14
3QFY
144Q
FY14
1QFY
15
Order intake (INR b)
12 August 2014 5
BHEL
Focus on cash realization led to a cash surplus situation after a gap of 4 years in FY14; also the rising trend in debtors had been arrested (1QFY15 debtors have declined 6% QoQ). We believe that improvement in BTB is an all important trend for capital goods companies, and has ramifications on several cyclical components including working capital, operating free cash flows and operating leverage.
Takeaways from concall Execution is likely to improve, with projects even in the private sector like
Lalitpur, Bara, Monnet, etc seeing some pick-up. Also, for new intake, the company is offering a lower execution period, and management expects projects particularly in Andhra Pradesh / Telangana, etc to avail this.
Railway project at Bhilwara continues to be on drawing board. For the solar PV manufacturing plant, the location is under finalization and the company has sought CCEA approval for capital subsidy of INR10b (project cost INR27b).
BHEL is launching a new super critical boiler based on own design, which can switch between 100% indigenous and imported coal. The management believes that this could be an important differentiation.
Valuations and view At the CMP of INR224, BHEL trades 22x / 15x its FY15e / FY16e EPS of
INR10/15.2 and trades 11x / 6.6x its FY15E / FY16E on EV / EBITDA basis. Maintain Buy rating on the stock with TP of INR300.
12 August 2014 6
BHEL
BHEL: an investment profile Company description BHEL is India’s dominant producer of power and
industrial machinery and a leading EPC company, established in the late 1950s as the government’s wholly-owned subsidiary.
The company has 14 manufacturing divisions, 8 service centers, 4 power sector regional centers besides project sites spread across all over India and abroad.
It has a manufacturing capacity of 20GW spread across multiple factories in India; including for thermal, hydro and gas projects.
Key investment arguments BHEL is strongly exposed to cyclical factors: i)
Contribution margins at ~42% vs EBIDTA margin of 12% in FY14, leading to a meaningful operating leverage ii) Core NWC stable at ~200 days; cyclical factors of Retention money (at ~200 days in FY14E vs 55-60 days in FY07-09) and customer advances (deteriorated from 63% of revenues in FY09 to 34% in FY13) that impacted NWC to normalize.
We expect Operating Cash Flows to improve from average of ~INR20b in FY10-13 to ~INR92b in FY15/16E.
Key investment risks 20% of the order book (~ INR 200b) is slow
moving. Increase in retention money, due to delay in
project commissioning schedules. Industry segment is majorly dependent on captive
power orders for its order inflows. Other segments like transportation & power T&D are still in developing stage.
Recent developments Chinese Electric Power Design Institute has
challenged TANGENCO’s order award worth INR92.1b to BHEL for their Ennore project.
BHEL is planning to enter retrofit business of utility power plants, as the pace of order finalization continues to be delayed.
Valuation and view We maintain Buy with a Price Target of INR300/sh
(20x FY16E). We expect BHEL to report EPS of INR9.8/sh (down 33.7%) in FY15 and INR14.9/sh (up 52%) in FY16.
Sector view We maintain our positive view on the sector.
Comparative valuations BHEL L&T Crompton
P/E (x) FY15E 22.3 36.5 31.2 FY16E 14.7 25.4 16.8 P/BV (x) FY15E 1.6 36.5 3.8 FY16E 1.5 25.4 3.2 EV/Sales (x) FY15E 1.2 2.2 0.9 FY16E 0.9 1.7 0.8 EV/EBITDA (x) FY15E 11.0 19.8 15.2 FY16E 6.6 16.4 10.4
EPS: MOSL forecast v/s consensus (INR) MOSL
Forecast Consensus Forecast
Variation (%)
FY15 10.0 12.4 -19.7 FY16 15.2 13.7 10.9 Target price and recommendation
Current Price (INR)
Target Price (INR)
Upside (%)
Reco
224 300 33.9 Buy
Shareholding pattern (%) Jun-14 Mar-14 Jun-13
Promoter 63.1 63.1 67.7
DII 16.6 16.5 12.2
FII 15.9 16.1 15.0
Others 4.4 4.3 5.1
Note: FII Includes depository receipts
Stock performance (1-year)
12 August 2014 7
BHEL
Financials and valuations Income statement (INR Million) Y/E Mar 2014 2015E 2016E 2017E Revenues 383,888 323,738 356,813 397,098 Change (%) -19 -16 10 11 EBITDA 45,198 36,228 49,603 62,823 EBITDA Margin (%) 11.6 10.9 13.6 15.4 Depreciation 9,829 11,066 12,364 13,912 EBIT 35,369 25,163 37,239 48,910 Interest 1,326 1,782 1,877 1,985 Other Income 16,160 12,254 17,953 22,163 Extraordinary items 253 0 0 0 PBT 50,456 35,634 53,315 69,089 Tax 15,849 11,047 15,995 20,727 Tax Rate (%) 31.4 31.0 30.0 30.0 Reported PAT 34,608 24,587 37,321 48,362 Adjusted PAT 36,303 24,587 37,321 48,362 Change (%) -45 -32 52 30
Balance sheet (INR Million) Y/E Mar 2014 2015E 2016E 2017E Share Capital 4,895 4,895 4,895 4,895 Reserves 325,575 341,533 365,754 397,141 Net Worth 330,471 346,428 370,649 402,036 Debt 26,548 26,734 26,734 26,734 Deferred Tax -19,690 -19,690 -19,690 -19,690 Total Capital Employed 337,329 353,473 377,694 409,081 Gross Fixed Assets 119,135 129,424 143,214 160,004 Less: Acc Depreciation 72,005 83,070 95,434 109,347 Net Fixed Assets 47,131 46,354 47,780 50,658 Capital WIP 6,220 5,000 5,000 5,000 Investments 4,202 4,202 4,202 4,202 Current Assets 650,670 601,896 642,462 693,177 Inventory 97,976 85,791 92,771 99,274 Debtors 399,530 315,379 276,353 279,489 Cash & Bank 118,729 173,581 244,868 284,333 Loans & Adv, Others 34,435 27,146 28,469 27,555 Curr Liabs & Provns 370,894 303,979 321,750 343,955 Curr. Liabilities 267,633 202,188 214,384 84,550 Provisions 103,260 101,792 107,366 113,522 Net Current Assets 279,776 297,917 320,712 349,221 Total Assets 337,329 353,473 377,694 409,081
E: MOSL Estimates
Ratios Y/E Mar 2014 2015E 2016E 2017E Basic (INR) EPS 14.8 10.0 15.2 19.8 Cash EPS 18.8 14.6 20.3 25.4 Book Value 135.0 141.5 151.4 164.3 DPS 2.8 3.0 4.6 5.9 Payout (incl. Div. Tax.) 19.1 30.0 35.1 35.1 Valuation(x) P/E 15.1 22.3 14.7 11.3 Cash P/E 11.9 15.4 11.0 8.8 Price / Book Value 1.7 1.6 1.5 1.4 EV/EBITDA 10.1 11.1 6.6 4.6 Dividend Yield (%) 1.3 1.3 2.0 2.6 Profitability Ratios (%) RoE 10.9 7.3 10.4 12.5 RoCE 11.0 7.3 10.2 12.4 Turnover Ratios (%) Asset Turnover (x) 1.2 1.0 1.0 0.9 Debtors (No. of Days) 372.9 347.0 275.8 250.7 Inventory (No. of Days) 91.4 94.4 92.6 89.0 Creditors (No. of Days) 100.8 84.7 87.8 89.7 Leverage Ratios (%) Net Debt/Equity (x) -0.3 -0.4 0.1 0.1
Cash flow statement (INR Million) Y/E Mar 2014 2015E 2016E 2017E OP/(Loss) before Tax 50,203 35,634 53,315 69,089 Depreciation 9,829 11,066 12,364 13,912 Others 0 0 0 0 Interest 1,326 1,782 1,877 1,985 Direct Taxes Paid 15,849 11,047 15,995 20,727 (Inc)/Dec in Wkg Cap 40,073 47,384 40,807 969 CF from Op. Activity 54,628 73,760 98,144 73,559 (Inc)/Dec in FA & CWIP -6,879 -9,069 -13,790 -16,790 (Pur)/Sale of Invt 90 0 0 0 Others 0 0 0 0 CF from Inv. Activity -6,789 -9,069 -13,790 -16,790 Inc/(Dec) in Net Worth -5,035 0 0 0 Inc / (Dec) in Debt 12,396 187 0 0 Interest Paid 1,326 1,782 1,877 1,985 Divd Paid (incl Tax) 12,465 8,244 11,190 15,319 CF from Fin. Activity -6,431 -9,839 -13,066 -17,304 Inc/(Dec) in Cash 41,408 54,851 71,287 39,465 Add: Opening Balance 77,321 118,729 173,581 244,868 Closing Balance 118,729 173,581 244,868 284,333
12 August 2014 8
BHEL
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This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Anosh Koppikar Kadambari Balachandran Email:[email protected] Email : [email protected] Contact(+65)68189232 Contact: (+65) 68189233 / 65249115 Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
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