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MOSL: BHEL (Sell)-Another loss making quarter as execution disappoints

BHEL: Another loss making quarter as execution disappoints

(BHEL IN, Mkt Cap USD2.8b, CMP INR59, TP INR40, 33% Downside, Sell)

 

No respite in sight, land monetization may not be feasible

• BHEL reported another loss-making 1QFY22, with revenue coming in 12% below our expectation. It reported a net loss of INR4.5b, slightly higher than our expected loss of INR4.3b. If not for the provision reversal of INR1.8b, reported losses would have been even higher.
• Of the total order book of INR1.02t, the executable order book stands at INR708b. BHEL is favorably placed in a few L1 orders. However, these orders are yet to finalize into final awarding. With commodity prices surging since BHEL was declared L1 in these orders, we see a higher chance of margin turning adverse in new orders as well.
• Higher fixed cost continues to dent operating performance. The company is yet to show a significant improvement in pending receivables, with total debtors at INR309b in 1QFY22 (v/s INR313b at the end of last year). In spite of the management’s ongoing efforts, we expect receivables to remain elevated in the near future. The management revealed that BHEL only has right to use its land bank and can’t monetize the same directly. This leaves out the land monetization option value for any upside case in BHEL. We maintain our estimates, TP of INR40/share, as well as our Sell rating.

 Operating performance disappoints

• Losses continue: Revenue grew 46% YoY to INR29b and was 12% below our expectation. Gross margin declined by 90bp to 33.2%. Other expenses stood at just 2.8% of sales, on a provision reversal of INR1.8b. Despite lower other expenses, operating loss stood at INR4.7b, slightly higher than our estimate. Net loss came in at INR4.5b v/s our expectation of INR4.3b.