MOSL: BHEL (Sell)-Above estimate, but constrained execution/weak pipeline warrant caution

BHEL: Above estimate, but constrained execution/weak pipeline warrant caution

(BHEL IN, Mkt Cap USD3.8b, CMP INR72, TP INR60, 16% Downside, Sell)

• 1QFY19 operating performance exceeds expectations: Sales grew 6.3% YoY to INR59.4b, marginally below our estimate of INR60.3b. Gross margin expanded 230bp YoY to 43.3% (above our estimate of 41.0%), driven by (a) indigenization of super-critical sets and (b) reduced sourcing costs. EBITDA grew 42% YoY to INR2.9b (ahead of our estimate of INR1.7b), with the margin expanding 120bp YoY to 4.8% (est. of 2.8%). PAT of INR1.6b (+92.5% YoY) was meaningfully ahead of our estimate of INR1.1b.
• Executable order book stands at INR980b, L1 in INR170b of orders: Order book stands at INR1.17t, of which ~83% is executable. BHEL is L1 in INR170b of orders, and order inflow for the quarter stood at INR44b (+143% YoY). BHEL expects ordering of 8-10GW for FY19. In the FGD segment, BHEL has till date received orders worth INR49b and is L1 in orders worth INR29b.
• Key highlights from earnings call: (a) MoU target for FY19: Sales of INR300b for very good standard and INR320b for excellent standard. (b) Expect industry wide orders of 8-10GW in FY19. (c) RM costs have come down during the quarter, led by higher indigenization and better sourcing strategy adopted by the company. (d) Of total debtors of INR379b, deferred debtors stand at INR69b. Current receivables stand at INR238b and has been bought down to 261days. Of the total debtors, 82% is from government companies, 14% is from the private companies and balance is from exports.