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MOSL: BHEL (Sell)-Operating losses continue as the recovery prolongs

BHEL: Operating losses continue as the recovery prolongs

(BHEL IN, Mkt Cap USD3.4b, CMP INR72, TP INR45, 38% Downside, Sell)

 

Working capital remains at elevated levels

• BHEL reported another loss making 2QFY22. While revenue stood ~10% above our expectation, lack of operating leverage led to losses at the operating level. It reported a net loss of INR675m, below our expected loss of INR2.3b, owing to lower other expenses (reversal of provisions ~INR1.8b) and revaluation of depreciation charges by ~INR580m. Adjusted for the above two items, losses are in line with our expectation.
• Of the total order book of INR1.1t, the executable order book stands at INR90b. Around 50% of the order book is fixed cost contracts, thus posing a risk to margin in a rising commodity price scenario. While it has maintained gross margin on a QoQ basis, the management expects some pressure in 3QFY22 too, as it is still negotiating with customers to pass on the price increase.
• Higher fixed cost continues to dent operating performance. The company is yet to show a significant improvement in pending receivables, with total debtors ~INR312b in 1HFY22 (v/s INR313b at the end of FY21). In spite of the management’s ongoing efforts, we expect receivables to remain elevated in the near future. We maintain our estimates and Sell rating, with an unchanged TP of INR45/share (10x FY24E EV/EBITDA).