The conversion of L1 is taking time and there have been large dropouts (Pudimadaka and Barethi). To us, Bhusawal and Panki also look difficult near-term. Pipeline beyond current L1 seemed thin with few distant opportunities. Working capital reduction is marginal.

Retain Underperform given cautious view on ordering, competition, profitability and employee costs. Long streak of weak RoE (5%) keeps us cautious in spite of low valuation.

Q3: Slower execution q-o-q; RM pressure continues

BHEL’s Q3 execution was up 18% y-o-y, reflecting continued strong execution on a very shallow book. RM cost to sales ratio at 64.6% (though lower 130 bp y-o-y) was still higher than our full-year estimate of 61% for FY18e. Like earlier quarters, Ebitda margin was supported by control on other expenses. Order inflows were weak at R16 bn, thus taking 9M inflows to R68 bn (vs 9M FY16 inflows of R281 bn). Working capital remains high with total receivables at R352 bn.

Order inflows weak; L1 also seeing drops

Weak order inflows is a reflection of sector weakness where clients are moving extremely slow on new projects. NTPC has cancelled the Barethi project and another large project Pudimadaka could move the same way. Total executable book stands at R590 bn (including the R40 bn Bhadradari project). Two potential additions to this list include Yadadari (environmental clearance awaited) and Bangladesh Maitree projects.

L1 conversion to take time; pipeline beyond that is thin

L1 book now stands at 5-6 GW, and the visibility of orders beyond that is low. Emission norms related ordering is likely to be staggered and will see strong competition.