BHEL (BHEL IN) - Q4FY23 Result Update - Execution and margins gradually picking up

We roll forward to FY25E and upgrade to ‘Reduce’ (Sell earlier) with revised TP of Rs67 (Rs36 earlier) valuing it at 15x FY25E (12x FY24E), factoring in gradual revival of thermal tendering and execution pace. BHEL reported a revenue growth of 2.1% to Rs82.3bn, with Adj. EBITDA margins coming in at ~7.5% in Q4FY23 vs 3.8% in Q4FY22 (adjusting for net provision). FY23 order inflows came in at Rs235bn (flat YoY) and order book stands at Rs913bn (4.1x FY23 revenue). Thermal power ordering is witnessing a pickup, after a gap of three years owing to rising power demand. BHEL is favorably placed in ~3700MW of orders. Additionally, projects of ~6000MW are under bidding stage for Yamunanagar, Adani Mundra, Talabira and Nayveli, which augurs well for BHEL in the medium term. While in industrial segment management targets to gradually increase its revenue contribution (~21% as of FY23), owing to strong traction witnessed in defence (SRGM for Navy), railways (strong Vande Bharat prospects), nuclear and hydro.

We believe, pickup in thermal power orders and companies focus on diversification in segments such as railways, defence, nuclear, hydro augurs well for company in long term. However, execution pace, operational efficiency and margins in near term will be closely watched. The stock is trading at PE of 31.1x/17.7x FY24/25E. Upgrade to ‘Reduce’.

Power segment drives revenue growth: On a standalone basis, revenue grew 2.1% YoY to Rs82.3bn (PL estimate of ~Rs92bn), led by growth in Power segment (up 3.9% YoY to Rs61.7bn), while Industry segment declined 0.7% YoY to Rs16.5bn. Company reported adj. EBITDA of Rs6.1bn, up ~98% YoY (PL estimate of Rs3.6bn), vs adjusted EBITDA of ~Rs3n in Q4FY22. Adj. EBITDA margins came in at 7.5% (PL estimate of 3.9%). Adj. PAT came in at ~Rs2.2bn, vs Rs669mn in Q4FY22, (PL estimate Rs2.1bn). partially impacted by higher interest cost (up ~68% to Rs1.6bn) and lower other income (down 12.6% YoY to Rs1.1bn).

Order book stands at Rs913bn: Order inflows in Q4FY23 came in at Rs57bn (32% YoY), driven by Industry segment (up 58% YoY – Rs47.8bn) and exports (Rs4bn in Q4FY23 vs Rs360mn in Q4FY22). Order book stands at Rs913bn (4.1x FY23 revenue), comprising of power (79%), Industry (16%) and exports (5%). Off which slow moving orders of Rs 178.5bn (Power – Rs170bn, Industry – Rs2.9bn and Exports Rs5.6bn). Key orders bagged in FY23 includes Power: 1) Renovation & Modernization of Steam Turbines for Ukai Thermal Power Station. 2) Order for flexible‐operations from Tata Trombay and WBPDCL Bakreshwar. Transportation: 1) Supply of 700 HP Diesel Electric Shunting Locomotive with dual driver’s cabin.