MOSL: BHEL (Sell)-Operating performance in-line-gross margin surprises

bhel: Operating performance in-line; gross margin surprises

(BHEL IN, Mkt Cap USD4.5b, CMP INR84, TP INR70, 17% Downside, Sell)

• 4QFY18 operating performance in line with expectations: Sales grew 4% YoY to INR102b, below our estimate of INR107b. Gross margin expanded 380bp YoY to 49.5%, higher than our estimate of 41.4%, driven by (a) tight control over costs via design optimization, (b) indigenization of super-critical sets and (c) reduced sourcing costs. EBITDA grew 117% YoY to INR12.3b, with the margin expanding 630bp YoY to 12.1% (est. of 11.5%). Other expenses included provisions for bad debt/LDs of INR11.4b and a forex write-back of INR1.9b. PAT of INR4.6b (+112% YoY) was below our estimate of INR8.1b on account of a high tax rate (64% v/s our estimate of 26%). Higher tax rate due to write-down of deferred tax assets is no longer deemed recoverable as of 4QFY18.
• Executable order book at INR986b (+50% YoY); L1 in INR160b of orders: Order book stands at INR1,181b, of which ~83% is executable. BHEL is L1 in INR160b of orders and has already won INR18b of orders in 1QFY19.
• Key highlights from earnings call: (a) Expect industry-wide orders of 8-10GW in FY19. (b) RM costs have come down in Q4/FY18, led by an improved product mix and a focus on cost optimization. c) Of total debtors of INR355b, ~INR175b is collectible and balance is deferred.