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MOSL: BHEL (Neutral)-Disappoints on execution-working capital deteriorates further

BHEL: Disappoints on execution; working capital deteriorates further

(BHEL IN, Mkt Cap USD2.6b, CMP INR55, TP INR52, 5% Downside, Neutral)

 

• Provision reversal supports margins, offsetting weak execution: Sales declined 8.2% YoY to INR62.3b (our estimate: INR71.3b) in 2QFY20. Gross margin shrank 420bp YoY to 37.2%. Net provisions were at -INR760m, leading to a 44% YoY decline in other expenses. Thus, EBITDA margin came in at 4.3% v/s our estimate of 3.5%, leading to a 10.8% YoY jump in EBITDA to INR2.7b. On account of higher interest expense of INR1.2b (+72% YoY), PBT declined 39% YoY to INR1.6b (13% miss). Effective tax rate stood at 27.9% v/s 31.8% last year. BHEL is still evaluating the option to move to new tax rates. As a result, adj. PAT was down 36% YoY at INR1.2b (16% miss). For 1HFY20, revenue declined 15.4% YoY to INR107.6b, whereas EBITDA was negligible. PAT level loss stood at INR977m.
• Power segment disappoints on execution: Power sales (70% of sales) declined 18% YoY to INR42b, while Industrial sales (30% to sales) grew strongly by 24% YoY to INR18b. PBIT margin expanded 200bp YoY to 10.3% in Power but shrank 180bp YoY to 3.0% in Industrial segment.
• Order backlog at INR1.1t, inflow up 44% YoY to INR74b: Order book stood at INR1.1t (-6.0% YoY). Order inflow stood at INR74b (+44% YoY) in 2QFY20. We build in order inflow of INR318b for FY20.