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Spark Capital: BHEL 2QFY14 Results Review - No respite from headwinds, Revise rating from ‘Reduce’ to ‘Sell’




Spark Capital Advisors(India) Private Limited


07 Nov 2013





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No respite from headwinds, Revise rating from ‘Reduce’ to ‘Sell’ BHEL reported muted 2QFY14 revenue of Rs. 89.8bn (14.9% de-growth) with an EBITDA margin of 4.6% and a PAT of Rs. 4.6bn, a de-growth of 64.2% yoy. This included the financials of Bharat Heavy Plates and Vessels (BHPV) which merged with the company during the quarter with a PBT level loss of Rs. 1.9bn (predominantly one-time staff cost provisions). Even after adjusting for this one time expense, PAT was significantly lower than our expectations. The management expects execution pace to pick up going forward as key private sector orders which were stalled earlier are witnessing traction currently. While it is also confident of securing sizeable orders from 15GW worth of orders on the anvil, considering the risks of delays in ordering including clearance and land acquisition issues, we expect order inflow to de-grow by 14% in FY14E and grow by 9% in FY15E over a low base. We also expect EBITDA margin to come under considerable pressure (11-13%) due to the relatively lower margin profile of the new orders which have been secured in a highly competitive market. Given the weakening order book, poor order inflow outlook, execution delays and contracting margins, we expect revenue and PAT to de-grow by 14% and 36% CAGR respectively in FY14E-FY15E. Considering the recent stock price increase (16% in 3 month) we revise our rating from ‘Reduce’ to ‘Sell’. Highlights of the quarter’s performance and outlook Order inflow outlook remains hazy – Order book at the end of 2QFY14 stood at Rs. 1.02tn (16% yoy de-growth) with a lackluster order inflow of Rs. 30.2bn. While the management is confident of securing sizeable orders from 15GW of orders in pipeline, we expect risk of ordering delays and intense competition to keep order inflow potential hazy. We expect order inflow of Rs. 272bn and Rs. 296bn in FY14E and FY15E respectively Industry segment margins impacted by merger, business prospects remains bleak – Industry segment registered an EBIT level loss of Rs. 42mn primarily due to merger of BHPV’s financials with the segment. Business outlook for the segment continues to remain weak due to muted demand from captive power market and lack of traction from other divisions. We expect industry segment to de-grow by 21% CAGR in FY14E-FY15E Working capital position remains stretched, other income boosted by forex gain – Payment delays from customer continued to stretch working capital position with working capital cycle increasing from 192 days in 4QFY13 to 222 days currently. Cash position has deteriorated from Rs. 77.3bn to Rs. 62.2bn during the same period. Other income (Rs. 5.0bn) was boosted by forex gain of Rs. 3.7bn during the quarter

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