MOSL: BHEL (Sell)-Operating performance below expectations

​BHEL: Operating performance below expectations; maintain Sell

(bhel IN, Mkt Cap USD4.9b, CMP INR126, TP INR100, 24% Downside, Sell)

• 1QFY18 operating performance disappoints: Sales for the quarter stood muted at INR55.1b (-1.9% YoY), below our estimate of INR58.9b, led by weak execution in Industrial segment (-8% YoY) and flat YoY Power segment sales of INR43.4b. BHEL recorded operating loss of INR0.9b, as against profit of INR0.7b in 1QFY17 (est. of INR62m profit), as other expenses increased 60% YoY to INR8.9b (v/s INR5.6b in 1QFY17) on account of higher employee pay revision provisioning (INR2.5b). PAT improved 3.9% YoY to INR0.8b, led by higher other income (INR4.6b v/s INR2.5b in 1QFY17 and est. of INR0.6b loss).
• Gross margin expanded 330bp YoY to 40.1%, led by a) expansion of vendor base, b) economic and bulk buying and c) use of in-house material leading to cost savings. According to management, margins would remain around the same levels for the next few quarters.
• L1 in 5GW of orders; slow-moving orders at INR390b. BHEL is L1 in 5GW of orders, marking an improvement from 2.4GW in 4QFY17. Incrementally, BHEL is declared L1 in NTPC’s Patratu project (2.4GW), for which environmental clearance is awaited. Order book stands at INR1014b, of which ~38% is slow-moving. Of the slow-moving orders, BHEL expects projects worth INR180b (Yedadri power project) to start moving over the coming months.