MOSL: BHEL (Sell)-Operating performance below expectations

​BHEL: Operating performance below expectations; maintain Sell

(BHEL IN, Mkt Cap USD5.3b, CMP INR93, TP INR78, 16% Downside, Sell)

• 2QFY18 operating performance disappoints: Sales came in muted at INR61.7b (-5.5% YoY) in 2QFY18, below our estimate of INR68.9b, led by weak execution in Industrial (-28% YoY) and lower sales in Power (INR50.6b; -3.6% YoY). Sales during the quarter were impacted by a lower executable order book (INR575b executable orders available) and a delay in finalization of key orders like Yedadri (non-availability of EC), Panki and Bhusawal. BHEL recorded an operating loss of INR1.0b (est. of INR3.8b profit), as against a profit of INR1.5b in 2QFY17. PAT improved 5.9% YoY to INR1.2b, led by higher other income (INR4.9b v/s INR2.0b in 2QFY17; above est. of INR2.0b).
• Higher provisioning leads to loss at operating level: Despite a gross margin improvement of 370bp YoY to 39.3%, BHEL posted an operating loss of INR1.0b, led by higher provisioning on account of employee wage revision of INR2.5b and contractual obligation provision of INR3.0b. This led to an increase in other expenses by 55% YoY to INR11.7b. BHEL booked a net profit of INR1.2b, led by higher-than-estimated other income. Other income stood at INR4.9b (INR2.0b in 2QFY17), driven by a forex gain of INR1.9b.
• L1 in 5.8GW of orders; slow-moving orders at INR216b. BHEL is L1 in 5.8GW of orders, and key orders include NTPC Patratu (3x800mw), Singareni (800mw), Mahagenco Bhusawal (660mw), and Udangudi (1320mw). Order book stands at INR970b, of which ~22% is slow-moving. We note that slow-moving orders fell to INR216b from INR390b in 1QFY18, led by finalization of the Yedadri order.