India Heavy Electricals Rating: Ad-Q4 Performance Bit Estimates

India Heavy Electricals’ (BHEL’s) Q4FY22 performance was ahead of our estimates as revenue grew 12.4% year-on-year to Rs 81 billion, leading to a 24% year-on-year increase in the power segment. Sales of raw materials have risen to 72% due to rising commodity prices, which affects gross margins. However, strict control over other expenditures (5.5% vs. 7% in Q4FY21), withdrawal of net provision of Rs 8.4 billion and ERV profit of Rs 0.9 billion helped to convert EBITDA into positive rupee against loss of Rs 11.5 billion.12.6 bn in Q4FY21. Order intake remained muted at Rs 43 bn, down 2% y-o-y, taking the current orderbook to1 trn (4.8x TTM sale).

In the wake of the ongoing power crisis, management has indicated improvements in the potential of coal-fired power plants, including the 7.7GW exploration pipeline (our estimated value is 700 billion +). We are monitoring pick-up in FGD tendering for non-NTPC coal plants. We expect that the pace of execution in the industry segment will accelerate due to the growing backlog and short-cycle nature of orders. Upgrading to add from sale with revised target price of Rs 59 (before: `45).

Healthy execution; Margins Improved with Provision Withdrawal: In Q4FY22, the company reported a 12% year-over-year increase in revenue, slightly ahead of our estimates. Power segment revenue grew 24% year-on-year to `59 billion, while industry segment declined 15% year-on-year to 17 17 billion. Higher raw material costs, at 72% of sales, have affected gross margins. However, a net provision of Rs 8.4 billion, right-back and ERV gain of Rs 0.9 billion resulted in a positive EBITDA of Rs 11.5 billion. Adjusted-PAT stands at Rs 9 billion, as against Rs 10 billion loss in Q4FY21.

Win some big orders; Looking sharply for green shoots: Order flow in Q4FY22 decreased 2% yoy to 43 billion. For FY22, with an EPC order from NPCIL for delivering 6x 700MWe PHWR and Turbine Island packages for FGD packages, 76% more than the year before, the order flow was Rs 236.9 billion. As the search pipeline at 7.7GW remains healthy, we expect a resurgence of FGD ordering, especially from the state and private sector, with acceptance and pick-up.

Marginal increase in receivables: Despite 24% annual growth, debtors’ arrears have increased by Rs 1.9 billion since March 21 and total debt stood at Rs 332 billion.
Sales Trade Receivable Breakup in FY22 are: 41% / 36% / 14% / 8% from State / Central PSU / Private / International entities.

Upgrade to ADD: In light of the ongoing energy crisis and past silent coal-fired power generation, management indicates improved prospects for coal-fired power plants. We expect FGD orders to increase in the near term. We believe that with domestic emphasis on production and efforts to improve the company’s balance sheet, BHEL can revive its strong technical track record. The company is taking cost-control measures and working to reduce receivables, thereby improving cash flow. As the order outlook and balance sheet improved, we revised our FY23E and FY24E earnings by 290% and 78%, respectively. We upgrade our ratings to add: a) improved thermal capacity and FGD tendering, b) due collection, and c) improved margins by reducing raw material costs.

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