MOSL: BHEL (Sell)-Operating performance; Exceeds expectations; gross margin surprises

BHEL: Operating perf. exceeds expectations; gross margin surprises

(BHEL IN, Mkt Cap USD8.0b, CMP INR95, TP INR80, 16% Downside, Sell)

• Operating performance better than expected: Sales came in line at INR66.2b (+5% YoY) in 3QFY18, with weak execution in Industrial segment (-17% YoY) partially offsetting 5% sales growth (to INR54b) in Power segment. Gross margin stood at 41.2% (+380bp YoY), higher than our estimate of 40%. Improvement in gross/material margins was driven by a) tight control over costs via design optimization, b) indigenization of super critical sets and c) reduced sourcing costs. EBITDA stood at INR3b (+32% YoY), with the margin at 4.5% (+100bp YoY) v/s our estimate of 2.6%. Other expenses included provisions of INR3.63b, which included a) INR1.1b of net provisions for contractual obligation/bad debts and b) INR2.5b of employee wage increase. PAT improved 64% YoY to INR1.5b, helped by a lower tax rate (19% v/s est. of 30%), which offset lower other income of INR1.4b (est. of INR2b). Other income had a forex variation loss of INR720m in 3QFY18.
• L1 in 5.3GW of orders; executable order book at INR817b (+47% YoY). BHEL is L1 in 5.3GW of orders – key orders include NTPC Patratu (3x800mw), Singareni (800mw), UPVRUNL Panki (660MW) and Gorakhpur (1.4GW). Order book stands at INR1,022b, of which ~80% is executable. We note that slow-moving orders fell to INR205b in 3QFY18 from INR390b in 1QFY18, led by finalization of the Yedadri order. Orders booked in 3QFY18 stood at INR120b.