BHEL stock rating: Edelweiss maintains Buy, with revised TP of Rs 110

We had upgraded BHEL to ‘Buy’ in July 2016 anchored by a few positive triggers on the horizon. Of these, thermal ordering/demand has not picked up materially, which remains a key monitor able. On the positive side though, the company’s executable order book (OB) has jumped to 78% (54% last year) in H1FY18 as execution of slow-moving orders has gathered pace and gross margin has improved to ~40%. Consequently, FY19/20 earnings visibility has improved along with potential for further improvement in working capital as thermal projects gather momentum. Maintain ‘Buy’ with DCF-based revised TP of Rs 110 (earlier Rs 115, implying FY19E PE at 23x) given reasonable working capital improvement potential and a medium-term revival in thermal demand from current 6-8GW p.a. On perusing BHEL’s L1 positions, we expect projects worth ~Rs 250 billion to be awarded by Mar‘18 end. Consequently, BHEL’s OB would increase to ~Rs 1.1 trillion, 3.8x TTM revenues. Lift irrigation projects, rolling stock and Sox Nox ordering could further add to the closing OB. Movement in standstill orders (Ennore and Yadadari) in past 1 year and translation of L1 position, will drive 11% revenue CAGR over next 2-3 years.

Ballooning debtors from ~300 days in FY13 to 480 days in FY16 had kept investors on tenterhooks. We believe the debtor recovery witnessed in FY17 to continue going forward, despite minor GST-led impact in H1FY18. While volatility in P&L is seen due to provision/reversal of liquidation damages, in our view, BHEL’s strong track record, mere 2% of projects have faced liquidation damage charges till date and exclusion of JDU clause for the new projects are likely to cushion OPM, albeit bigger delta will depend on extent of ramp-up.

We note that the government’s thrust on renewables was the key negative for BHEL in past 1 year. However, we believe, such transition will be slower and tendering for conventional energy would range in 10-12GW, including replacement in foreseeable future, where BHEL commands significant market share, ~65%.

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