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Spark Capital: BHEL 2QFY13 Results Review - Further deterioration in fundamentals, Downgrade to Sell




Spark Capital Advisors(India) Private Limited


01 Nov 2012





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Further deterioration in fundamentals, Downgrade to Sell BHEL reported flat quarterly revenue of Rs. 105.6bn with an EBITDA margin of 18.0%. PAT stood at Rs. 12.7bn, a de-growth of 9.8% yoy. Weak execution pace was due to a combination of client side delays in the power segment and weak industrial demand from sectors like cement, paper and metals. Order book de-grew by 24% to Rs. 1.22tn with order inflow remaining tepid at Rs. 31.5bn (adjusted for currency fluctuation). While the management remains confident of securing sizeable orders from 5-6 projects with order potential of 10-15GW in total (to be tendered in the near term), risks of delays in ordering remains high as clearance and land acquisition issues keep ordering award pace uncertain. Given weakening order book, poor order inflow outlook and execution delays, we expect revenue growth to remain flat in FY13E and de-grow by 7% in FY14E. EBITDA margin is expected to remain under pressure due to lack of operating leverage thereby leading to a PAT de-growth of 17% in both FY13E & FY14E. Considering the multiple headwinds expected to be faced by BHEL, we downgrade the stock from ‘Reduce’ to ‘Sell’ rating with a target price of Rs. 199. Highlights of the quarter’s performance and outlook No near term positives for order inflow – Order book at the end of 2QFY13 stood at Rs. 1.22tn with an order inflow of Rs. 31.5bn comprising of Rs. 19.4bn (1.4GW) orders from power segment and Rs. 12.5bn from industry. While the management is confident of securing orders from 5-6 projects – Rajasthan, Maharashtra, NPTC, NLC, AP – expected to be tendered in the near term, we expect risk of ordering delays and intense competition to keep order inflow potential hazy. Similarly, lack of traction in industrial capex is expected to keep industrial orders capped going forward. Execution issues prevail across segments – Revenue growth for BHEL which had started to weaken over the past 2-3 quarters slowed further in 2QFY13 due to execution issues faced in both power and industry segments. While industry segment de-grew by 30.6% yoy due to weak industrial demand, power segment’s growth (14.9% yoy) was affected due to client side and payment delays. Similarly, international operations have faced execution issues in Syria & Yemen. We expect revenue to remain flat in FY13E and de-grow by 7% in FY14E Working capital expands further– Working capital cycle has increased from 143 days in FY12 to 177 days currently due to payment delays from customers and also lowered mobilization advances received due to muted order inflow. Cash position has also depleted thereby translating to lower other income (58% yoy de-growth). We expect working capital situation to remain at elevated levels as new order advances remain low and payment condition remains tight

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