BHEL reported a Q4FY20 revenue decline of c53% y-o-y, attributable to the shortage of material due to COVID-19. The high material costs, despite the reduction in other expenses, resulted in the Ebitda loss. In addition, the reversal of the deferred tax asset as BHEL moved to a lower tax rate resulted in a Rs 15.3-bn loss, which is the highest it has ever reported. While it did manage to lower its total trade receivables to Rs 364 bn from Rs 386 bn at the beginning of 2020, its unbilled revenue increased y-o-y, despite the 30% y-o-y decline in FY20 revenue.
Going concern moves slowly: In August 2019, we argued that the intrinsic value/replacement value of assets and the potential improvement in working capital will unlock value. We now believe the value-unlocking process is moving slowly and the financial health of BHEL’s main customers has further deteriorated, which will put a strain on working capital.
Long-term outlook hazy: We have so far believed that, at least, in the long term, India will need additional thermal capacity. However, weak growth is pushing power demand growth and, as such, new capacity growth farther into the future. In the interim, renewable energy (RE) is becoming more reliable. While BHEL is diversifying, we believe it is unlikely to fill the decline in its core thermal equipment business in the medium term.
Replacement value justifies our new Hold rating: At the current valuation, net cash, net working capital, and receivables account for c13%, c240% and 330% of BHEL’s market cap, respectively. It also has 16,000 acres of land, which we believe has substantial value.
Valuation: We lower our FY21e Ebitda by 29% to factor in COVID-19, though we raise our FY22e Ebitda by 15%. We continue to value BHEL on a DCF model. We roll forward our valuation to June 2020 from March 2020. Our TP of Rs 30 remains unchanged, and we downgrade our rating for the stock to Hold (from Buy).