Motilal Oswal neutral on Bharat Heavy Electricals

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Motilal Oswal neutral on Bharat Heavy Electricals

Motilal Oswal has maintained neutral rating on Bharat Heavy Electricals (BHEL) with a target of Rs 258, in its January 28, 2012 research report.

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Motilal Oswal has maintained neutral rating on Bharat Heavy Electricals (BHEL) with a target of Rs 258, in its January 28, 2012 research report.

"BHEL's 3QFY12 revenue grew 19% YoY to INR105b (v/s our estimate of INR102b), driven by strong execution. Reported PAT of INR14.3b, up 2% YoY, was above our est. of INR13.1b, driven by slightly better EBITDA margins at 19.4% v/s our est. of 18.5% and lower tax rate. Order intake for the first nine months of FY12 was down 59% YoY at INR152b (v/s intake of INR168b in 1HFY12). During the quarter, orders worth INR58.5b were cancelled, or their scope was changed. Order book stood at INR1,465b, down 9% QoQ and 7% YoY. Adjusted EBITDA margin declined 380bp YoY, led by Power segment. EBITDA margin was impacted by sharp rise in other expenditure, up 65% YoY (12.2% of sales v/s 8.8% in 3QFY11) which, in turn, was driven by much higher provisions mainly relating to contractual obligations and liquidated damages."

"Working capital deteriorated further due to rising receivables and declining advances from customers, given decline in fresh order inflow. Net working capital (ex cash) increased from 17% of TTM revenue as at the end of 2QFY12 to 20% at 3QFY12 end. BHEL's stock price corrected significantly over the last one year. We still remain Neutral on the stock, as we believe BHEL's valuations will remain under pressure due to multiple de-rating triggers: (1) Possible downside to our order intake assumptions in FY12/13 due to worsening external environment in the power sector, (2) Downside risk to FY13 earnings estimate due to execution constraints and deteriorating working capital, and (3) Uncertainty around the company's proposed follow-on offer (FPO)," says Motilal Oswal research report. 

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