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MOSL: BHEL (Neutral) - Adj EBITDA margins drop to 6.7% given poor cost absorption




Motilal Oswal Securities Ltd.


07 Nov 2013





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BHEL (BHEL IN, Mkt Cap USD5.5b, CMP INR141, Neutral) Satyam Agarwal (AgarwalS@MotilalOswal.com) / Nirav Vasa (Nirav.Vasa@MotilalOswal.com) BHEL’s 2QFY14 revenues were significantly above est. at INR88.2b (down 15% YoY) vs est. of INR82.4b (down 21% YoY) and adjusted EBIDTA margins at 6.7% (down 1130bps). Adjusted PAT at INR5.9b (down 53.7% YoY) was in-line with estimates of INR5.7b (down 55%) and is supported by increased other income at INR5b (which includes INR3.7b as forex gains on receivables). Adj. to EBIDTA / PAT pertains to PBT loss of INR1.9b on merger of BHPV, and is largely related to readjustment of staff costs of INR1.4b (based on BHEL’s norms for actuarial valuations, etc) and is thus one-time in nature. Margins declined steeply in 2QFY14 given poor fixed cost absorption with adjusted staff costs at 16.3% (up 231 bps) and SGA expenses at 18.1% (up 819 bps), while RM costs as % of revenues also increased to 59.3% (up 128bps). We are perplexed by the sharp increase in SG&A expenses to 18.1% of revenues, and is partly explained by provisions of INR4.3b pertaining to bad and doubtful debts / liquidated damages, etc. Gross order inflow was just INR30b (power sector INR8.8b, Industry INR16.5b, international sector INR4.7b). The management stated that BHEL is favorably positioned in ~5GW of projects to be awarded in 2HFY14. Working capital situation continues to be stretched and debtors at the end of 2QFY14 stood at INR386b (including INR208b of retention money to be released on project completion). Net Cash balance at the end of 2QFY14 declined to INR54b, down 15% since March 2013. To factor in the constrained macro environment, we are cutting FY14 / FY15 estimates by 18% and 9% respectively. We now expect BHEL to report EPS of INR14.3/sh (down 47%) in FY14 and INR9.9/sh (down 31.1%) in FY15. At the CMP of INR141, BHEL trades 9.8x / 14.2x its FY14E / FY15E EPS. We maintain Neutral rating on BHEL with a revised target of INR148 (15x FY15 EPS).

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