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BHEL 3QFY2014 performance highlights and results update

February 7, 2014, Friday, 09:48 GMT | 05:48 EST | 15:18 IST | 17:48 SGT
Contributed by Angel Broking

For 3QFY2014, Bharat Heavy Electricals (BHEL) reported a disappointing performance, with its top-line coming in below our estimates as well as street expectations. The top-line declined sharply by 15.5% yoy to Rs.8,635cr (vs our estimate of 11.0% yoy decline to Rs.9,095cr). The company reported an 11.9% yoy decline in Power segment revenue to Rs.7,320cr due to slow-moving orders. Projects from private companies such as Jaiprakash Associates, Bajaj Hindustan, Monet Power, and India Bulls phase 2 among others (constituting almost 20-25% of order book) are still facing delay in payments and project clearances at customer ends, thus leading to delay in revenue booking for BHEL. The company also reported a 28.5% yoy decline in Industry segment revenue to Rs.1,600cr due to slowdown in investments.
On the EBITDA front, the company's margin contracted by 457bp yoy to 11.4%. The low visibility of new orders on horizon has led to intense competition, thereby resulting in pricing pressure. Consequently, the adjusted PAT declined by 41.2% yoy to Rs.695cr (in-line with our estimate of Rs.709cr).
Declining order backlog: BHEL reported an 11.5% yoy decline in order backlog to Rs.100,600cr by the end of the quarter (3QFY2014), thus implying an order book coverage of ~2.3x, which has been continuously deteriorating over the last couple of years. The Management has indicated order visibility of 17GW, mainly from state and central utilities, out of which 7.7GW is expected to be finalized by March 2014. However, considering the headwinds in the power sector, delays in finalization of orders and execution cannot be ruled out.
Outlook and valuation: Given the strong competition (domestic as well as international), declining order book, and a weak capex cycle, we expect BHEL’s margin and ROE to decline from the current levels. Hence, the cheaper valuations of 10.6x FY2014E EPS and 13.9x FY2015E EPS are largely overshadowed by structural issues plaguing the company. We continue to remain Neutral on the stock.