BHEL's Q3FY20 earnings continued to disappoint due to 23% y-o-y revenue decline as its two key projects are on hold (Yadadri and Udangudi). Due to forex gains and reversal of provisions, better margins are offsetting part of the revenue miss. But, operating performance was below expectations. BHEL's management has refrained from providing any revenue guidance as its focus has shifted to cash-flow management; the company has Rs 380 bn of pending receivables, which has hardly moved over the last few years.
We cut our earnings estimates by 9-13% over FY20-22e to account for poor execution and the weak ordering environment. While orders are few to come by, the pricing environment continues to be very competitive, limiting scope for margin expansion. Maintain Neutral with a lower TP of Rs 40.
Tepid performance as execution disappoints: Q3FY20 revenues were down 22.6% to Rs 56.8 bn and missed our estimates by 27%. Gross margins deteriorated to 36.6% (- 100bp y-o-y) indicating poor pricing of the current order book as BHEL has been aggressive in winning these orders. Ebitda margin expanded to 5.8% (+280bp y-o-y) and was better than our estimates 4.5% owing to forex income of Rs 1.4 bn and reversal of provisions. Other income was down 33% to Rs 1.5 bn in absence of any cash-flow generation. Overall, adj.PAT declined 17% y-o-y to Rs 1.6 bn and was 11% below expectations.
Key takeaways from commentary: Execution was tepid owing to lower order book and delays in executions,especially Yadadri and Udangudi as clients had put orders on hold. Near-term ordering pipeline includes Lara, Singrauli and Talcher, as well as opportunities in the FGD side. The company is L1 in Talcher order worth Rs 63 bn as well as FGD orders worth Rs 42 bn. Total receivables are elevated at Rs 380 bn, of which 12% is from the private sector, 48% is from state entities, 31% is from the Centre and 9% is related to global market.