Sell BHEL; target of Rs 60: Motilal Oswal

Motilal Oswal's research report on BHEL

Sales grew 7.7% YoY to INR67.8b (our estimate: INR71.4b). Gross margin expanded 210bp YoY to 41.4% (in line with our estimate of 41.1%). EBITDA stood at INR2.4b (our estimate: INR4.9b), with the margin of 3.6% missing our estimate of 6.8% due to higher other expenses. Depreciation stood at INR521m, down 72% from INR1,872m in 2QFY18 on account of revision in useful life of assets. PAT of INR1.9b (+60.4% YoY) was meaningfully below our estimate of INR2.9b. For 1HFY19, sales/EBITDA/PAT grew 7%/391%/74% YoY. We estimate sales/EBIDTA/PAT growth of 11.5/50%/46% YoY in 2HFY19.

Outlook

Despite the weak-than-estimated operational numbers, our earnings estimates for FY19/20 remain intact, as lower depreciation due to upward revision in useful life of assets (INR5b run-rate v/s our prior estimate of INR8b) more than offset our operating profit cut of 12/17% for FY19/20. We maintain Sell with a TP of INR60 (15x FY20E EPS, in line with 10Y average P/E), given (a) the likelihood of constrained execution and (b) the weak order pipeline for FY19/20.