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MOSL: BHEL (Sell)-Sharp decline in gross margins a cause for concern

BHEL: Sharp decline in gross margins a cause for concern

(BHEL IN, Mkt Cap USD3b, CMP INR59, TP INR47, 20% Downside, Sell)

 

• Operating performance below expectations: Sales grew 10.1% YoY to INR73.4b v/s our estimate of INR73.6b. Gross margin contracted 400bp YoY to 37.6% (below our estimate of 41%), impacted by higher imports during the quarter and adverse revenue mix. EBITDA stood at INR2.2b, which included forex loss of INR2.1b. Adjusting for this, EBIDTA stood at INR4.3b (below our estimate of INR4.6b). Adjusted EBIDTA margin stood at 5.8%, below our estimate of 6.3%. Depreciation stood at INR1.1b, down 38% from INR1.8b in 3QFY18 on account of revision in useful life of assets. PAT at INR1.9b (+25.3% YoY) was meaningfully below our estimate of INR2.6b. For 9MFY19, sales/EBITDA/PAT grew 8%/100%/52% YoY.
• Power Segment disappoints: Power segment (contributes 78% to sales), registered muted growth of 3% YoY to INR55b. Industrial segment (contributes 22% to sales), registered healthy growth of 41% YoY to INR16b. Margins in the power segment declined 370bp YoY to 10.7%, impacting overall company's performance. Margins in the industrial segment stood stable at 3.5%.
• Order backlog at INR1.16t, L1 in INR220b of orders: Order book stood at INR1.16t (+14% YoY), incrementally the company is L1 in INR220b of orders (Power: INR190b, FGD: INR37b, Industrial: INR10b, International: INR20b). Order inflow for the quarter stood at INR77b (-36% YoY) and we build in order inflow of INR340b for FY19. 9MFY19 order inflow stood at INR172b.