30 MAY 2016 Quarterly Update

BHARAT HEAVY ELECTRICALS BUY

ENGINEERING Target Price: Rs 151

Gross margin improvement to be gradual

CMP : Rs 128
BHELreported turnaround in Q4 with EBITDA of Rs 3.6 bn after reporting
Potential Upside : 18%
losses in previous 3 quarters. Material costs (as % of sales) declined to
64% in Q4 from 65.8% in Q2 but remains higher than ~60% in FY14-
15. Working capital remains at elevated level of214 days as on MARKET DATA
Mar’16 vs. 206 YoY due to increase in debtor days and drop in No. of Shares : 2,448 mn
customer advances. Free Float : 37%
Market Cap : Rs 314 bn
Order pipeline remains strong: In the power segment, BHEL is L1 in ~12 52-week High / Low : Rs 290 / Rs 90
GW of domestic orders and expects finalization of ~7 GW worth of Avg. Daily vol. (6mth) : 7.3 mn shares
orders in FY17. These projects will be mostly from states and Centre. In Bloomberg Code : BHEL IB Equity
the Industry segment, growth will be driven by (a) modernization drive Promoters Holding : 63%
FII / DII : 16% / 18%
by Railways and locomotive manufacturing through PPP route and (b)
strong T&D capex. We expect FY17/18 order inflow at 9.5 GW each.

Improving quality of order backlog:FY16 order inflow at Rs 437 bn was up 42% YoY. However, excluding Telangana
order worth Rs 180 bn it won in Q1 (execution yet to commence pending environment clearance)and the Rs 78 bn
Tamil Nadu order in FY15 (which is stuck in legal dispute), FY16 order inflow grew by 13% YoY. Order backlog at
Rs 1,100 bn was up 9% YoY.Notably, order inflow mix improved in FY16 with <10% share of orders withJoint deed of
Undertaking (JDU) from technology supplier i.e. Alstom vs. 60-80% of orders during FY13-14. Under JDUclause, BHEL
has to outsource 12-15% of critical boiler parts to Alstom which impacts its margin significantly.Additionally, share of
EPC has declined to ~50% in FY16 from ~85% in FY15.

Gross margin to improve gradually; cut FY17 estimates: While gross margin declined sharply in Q2FY16 on account
of higher share of projects with JDU clause, the improvement thereafter has been slow.We cut our FY17E EPS by 16% to
Rs 5.1 (vs Rs 6.1 earlier) to factor in gradual improvement in gross margin (as share of orders with JDU clause decline).
Maintain FY18E EPS at Rs 8.3 and BUY rating with target price of Rs 151 (18x FY18E).‎

Financial summary (Standalone) Key drivers

Y/E March FY15 FY16 FY17E FY18E (Rs bn) FY16 FY17E FY18E
Sales (Rs mn) 295,420 253,472 317,088 357,872 Order inflow 437 480 492
EBITDA (Rs mn) 27,851 (14,491) 16,703 26,291 Backlog 1,107 1,253 1,368
Adj PAT (Rs mn) 17,421 (10,542) 12,541 20,380 Margin -6.4% 5.1% 7.1%
Con. EPS* (Rs.) - - 3.8 7.2
EPS (Rs.) 7.1 (4.3) 5.1 8.3
Price performance
Change YOY (%) (38.0) (160.5) (219.0) 62.5
150
P/E (x) 18.0 (29.8) 25.0 15.4 Sensex Bharat Heavy Electricals

RoE (%) 5.5 (3.4) 4.2 6.6 100

EV/E (x) 7.8 (14.8) 12.9 8.6 50

DPS (Rs) 2.0 2.0 3.0 3.0
0
Source: *Consensus broker estimates, Company, Axis Capital Apr-15 Jul-15 Oct-15 Jan-16 Apr-16

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 30 MAY 2016 Quarterly Update
BHARAT HEAVY ELECTRICALS
ENGINEERING

Exhibit 1: Results update

Quarter ended 12 months ended
(Rs. mn) Mar-16 Mar-15 % Chg Dec-15 % Chg FY16 FY15 % Chg
Net Sales/Income form op 100,048 126,860 (21.1) 53,256 87.9 261,393 304,830 (14.2)
EBIDTA 3,638 16,818 (78.4) (16,387) (122.2) (14,491) 27,851 (152.0)
Other income 2,909 3,830 (24.1) 1,706 70.5 7,941 9,010 (11.9)
PBIDT 6,547 20,648 (68.3) (14,682) (144.6) (6,551) 36,861 (117.8)
Depreciation 2,428 2,821 (13.9) 2,255 7.7 9,356 10,773 (13.2)
Interest 140 265 (47.4) 52 166.9 268 917 (70.7)
PBT 3,979 17,562 (77.3) (16,989) (123.4) (16,175) 25,172 (164.3)
Tax 1,149 5,450 (78.9) (5,969) (119.2) (5,633) 7,751 (172.7)
Adjusted PAT 2,830 12,111 (76.6) (11,020) (125.7) (10,542) 17,421 (160.5)
Extra ordinary income/ (exp.) - - - 0 - 6,528 (956) (782.6)
Reported PAT 3,596 8,985 (60.0) (11,020) (132.6) (7,041) 14,193 (149.6)
No. of shares (mn) 2,448 2,448 - 2,448 - 2,448 2,448 -
EBIDTA margin (%) 3.6 13.3 - (30.8) - (5.5) 9.1 -
PBIDT margin (%) 6.5 16.3 - (27.6) - (2.5) 12.1 -
EPS (Rs.) 1.2 4.9 (76.6) (4.5) (125.7) (4.3) 7.1 (160.5)
Source: Company, Axis Capital

BHEL to be a key beneficiary of new power emission norms

New norms require existing power plants to reduce their SOx and NOx emission
levels by 33-40% over 2 years and new plants (post 2017) to reduce by 67-80%
from current levels. This will result in BTG cost for a new build power plant rising
from ~Rs 25 mn/MW to ~Rs 35 mn/MW. Moreover, volumes are expected to rise
to ~15 GW p.a. from 8-10 GW p.a. currently. This would imply opportunity
landscape of BTG market rising to ~USD 12 bn pa from USD 4 bn pa currently.

BHEL along with Thermax and L&T would be key beneficiary of new emission norms
from:(a) orders worth ~Rs 1 trn for retrofit, and (b) 50% expansion in BTG market
volumes to 15-17 GW pa due to scrappingof old 30-35GW power plants.

Management commented that 60-80 GW of BHEL's installed fleet will require FGD
installation. All new tenders are coming with SCR and FGD requirement. BHEL is
well equipped with FGD from MHI and has developed in-house SCR. Overall capex
on FGD and SCR is expected to be Rs 8-10 mn /MW.

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 30 MAY 2016 Quarterly Update
BHARAT HEAVY ELECTRICALS
ENGINEERING
Financial summary (Standalone)
Profit &loss (Rs mn) Cash flow (Rs mn)
Y/E March FY15 FY16 FY17E FY18E Y/E March FY15 FY16 FY17E FY18E
Net sales 295,420 253,472 317,088 357,872 Profit before tax 25,172 (16,175) 17,916 29,115
Other operating income 9,410 7,921 9,505 10,456 Depreciation & Amortisation (10,773) (9,356) (9,519) (9,974)
Total operating income 304,830 261,393 326,593 368,328 Chg in working capital (9,315) 20,193 (10,235) (29,037)
Cost of goods sold (177,666) (168,599) (204,390) (226,701) Cash flow from operations 16,568 22,777 12,094 1,586
Gross profit 127,164 92,794 122,203 141,628 Capital expenditure (4,006) (5,559) (4,000) (4,000)
Gross margin (%) 43.0 36.6 38.5 39.6 Cash flow from investing (4,897) (8,284) (6,726) (6,726)
Total operating expenses (99,313) (107,286) (105,501) (115,337) Equity raised/ (repaid) - - - -
EBITDA 27,851 (14,491) 16,703 26,291 Debt raised/ (repaid) (25,938) 653 - -
EBITDA margin (%) 9.4 (5.7) 5.3 7.3 Dividend paid (4,895) (4,895) (7,343) (7,343)
Depreciation (10,773) (9,356) (9,519) (9,974) Cash flow from financing (32,273) (5,074) (8,591) (8,591)
EBIT 17,078 (23,848) 7,183 16,316 Net chg in cash (20,602) 9,418 (3,222) (13,730)
Net interest (917) (268) (268) (268)
Other income 9,010 7,941 11,001 13,067 Key ratios
Profit before tax 25,172 (16,175) 17,916 29,115 Y/E March FY15 FY16 FY17E FY18E
Total taxation (7,751) 5,633 (5,375) (8,734) OPERATIONAL
Tax rate (%) 30.8 34.8 30.0 30.0 FDEPS (Rs) 7.1 (4.3) 5.1 8.3
Profit after tax 17,421 (10,542) 12,541 20,380 CEPS (Rs) 10.2 0.9 9.0 12.4
Minorities - - - - DPS (Rs) 2.0 2.0 3.0 3.0
Profit/ Loss associate co(s) - - - - Dividend payout ratio (%) 34.5 (69.5) 58.5 36.0
Adjusted net profit 17,421 (10,542) 12,541 20,380 GROWTH
Adj. PAT margin (%) 5.9 (4.2) 4.0 5.7 Net sales (%) (22.5) (14.2) 25.1 12.9
Net non-recurring items (3,228) 3,501 - - EBITDA (%) (42.3) (152.0) (215.3) 57.4
Reported net profit 14,193 (7,041) 12,541 20,380 Adj net profit (%) (38.0) (160.5) (219.0) 62.5
FDEPS (%) (38.0) (160.5) (219.0) 62.5
Balance sheet (Rs mn) PERFORMANCE
Y/E March FY15 FY16 FY17E FY18E RoE (%) 5.5 (3.4) 4.2 6.6
Paid-up capital 4,895 4,895 4,895 4,895 RoCE (%) 7.9 (5.1) 6.0 9.5
Reserves & surplus 313,744 294,290 298,240 310,030 EFFICIENCY
Net worth 318,639 299,185 303,135 314,925 Asset turnover (x) 1.3 1.2 1.6 1.7
Borrowing 610 1,263 1,263 1,263 Sales/ total assets (x) 0.4 0.4 0.5 0.5
Other non-current liabilities - - - - Working capital/ sales (x) 0.6 0.6 0.5 0.5
Total liabilities 662,464 635,553 659,744 708,397 Receivable days 465.0 512.7 421.7 421.2
Gross fixed assets 125,932 131,491 140,491 144,491 Inventory days 133.1 127.5 133.0 136.0
Less: Depreciation (84,349) (93,705) (103,224) (113,199) Payable days 306.8 292.0 280.4 293.4
Net fixed assets 41,583 37,786 37,266 31,292 FINANCIAL STABILITY
Add: Capital WIP 5,000 5,000 - - Total debt/ equity (x) - - - -
Total fixed assets 46,583 42,786 37,266 31,292 Net debt/ equity (x) (0.3) (0.3) (0.3) (0.3)
Total Investment 4,177 6,634 9,091 11,549 Current ratio (x) 1.8 1.7 1.7 1.7
Inventory 101,017 96,374 112,935 127,461 Interest cover (x) 18.6 (88.9) 26.8 60.8
Debtors 376,373 356,031 366,327 413,008 VALUATION
Cash & bank 98,127 100,860 97,638 83,907 PE (x) 18.0 (29.8) 25.0 15.4
Loans & advances 34,437 31,648 34,749 39,219 EV/ EBITDA (x) 7.8 (14.8) 12.9 8.6
Current liabilities 343,215 335,105 355,346 392,209 EV/ Net sales (x) 0.7 0.8 0.7 0.6
Net current assets 268,489 251,029 258,041 273,348 PB (x) 1.0 1.0 1.0 1.0
Other non-current assets - - - - Dividend yield (%) 1.6 1.6 2.3 2.3
Total assets 662,464 635,553 659,745 708,397 Free cash flow yield (%) 4.0 5.5 2.6 (0.8)
Source: Company, Axis Capital Source: Company, Axis Capital

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 30 MAY 2016 Quarterly Update
BHARAT HEAVY ELECTRICALS
ENGINEERING

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Research Team

Sr. No Name Designation E-mail

1 Sunil Shah
2 Pankaj Bobade
3 Priyakant Dave
4 Akhand Singh
5 Bunty Chawla
6 Hiren Trivedi
7 Poonam Darade
8 Sankar Narayanan
9 Kiran Gawle
Head of Research sunil.shah@axissecurities.in
Research Analyst pankaj.bobade@axissecurities.in
Research Analyst priyakant.dave@axissecurities.in
Research Analyst akhand.singh@axissecurities.in
Research Analyst bunty.chawla@axissecurities.in
Research Associate hiren.trivedi@axissecurities.in
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Associate kiran.gawle@axissecurities.in

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 30 MAY 2016 Quarterly Update
BHARAT HEAVY ELECTRICALS
ENGINEERING

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