BHEL (BHEL.NS): Derating Continues, Stay UW : Morgan Stanley Research
It is not over by a long shot: Given the 94% underperformance of BHEL over the last 4 years, clients keep asking - where is the bottom? We continue to stick to our stance that it is still a ways away. Our thesis has been for a three "M" derating on BHEL - Market share, Margins and Multiples. The first stage has already played out with marketshare losses to both foreign and domestic competition, leading to part of the third driver (multiple) also playing out. The second stage of the derating began in F3Q13 and continues - EBITDA margins were down 860 bps YoY to just 4.5%, and we think more multiple pain is likely to follow.
1Q is a small quarter, but we think drawing some conclusions makes sense: Reported revenues for F1Q14 of Rs66.7 bn were down 24% YoY (Exhibit 1), around 17% behind MSe and 20% below consensus. Even adjusted for the backdrop of the revenue performance in F1Q13 and hence the base (Exhibit 2), the 2 year CAGR continued to be disappointing, with the company registering the first decline on a quarterly basis in the last 10 years, showing the lack of any base effect. Despite a 34% YoY jump in other income, the collapse in margins led to a 52% YoY fall in net profit to Rs4.6 bn.
Back to Weak Inflows & Strong Cash Burn, after the Seeming Improvement in F4Q13: The orders inflows booked in the quarter were down 74% YoY to Rs14.7 bn, with the sales outstripping inflows again (Exhibit 4), pulling order backlog down 17% YoY. More importantly, BHEL continues to burn cash, with net cash (after removing debt) moving down to Rs14 / share from Rs26 / share in F2013 (Exhibit 11.)
We Continue to Advise Switching: Despite consistent underperformance over the last 3 years, given the high competitive (domestic) intensity, and slack demand for power generation capacity, we think investors should consider Adani Ports (APSE.NS, OW, 125.25 INR) which has strong earnings growth coming up, or even L&T (LART.BO, EW, 830.15 INR), which is undergoing a cyclical downturn at the moment.
1Q is a small quarter, but we think drawing some conclusions makes sense: Reported revenues for F1Q14 of Rs66.7 bn were down 24% YoY (Exhibit 1), around 17% behind MSe and 20% below consensus. Even adjusted for the backdrop of the revenue performance in F1Q13 and hence the base (Exhibit 2), the 2 year CAGR continued to be disappointing, with the company registering the first decline on a quarterly basis in the last 10 years, showing the lack of any base effect. Despite a 34% YoY jump in other income, the collapse in margins led to a 52% YoY fall in net profit to Rs4.6 bn.
Back to Weak Inflows & Strong Cash Burn, after the Seeming Improvement in F4Q13: The orders inflows booked in the quarter were down 74% YoY to Rs14.7 bn, with the sales outstripping inflows again (Exhibit 4), pulling order backlog down 17% YoY. More importantly, BHEL continues to burn cash, with net cash (after removing debt) moving down to Rs14 / share from Rs26 / share in F2013 (Exhibit 11.)
We Continue to Advise Switching: Despite consistent underperformance over the last 3 years, given the high competitive (domestic) intensity, and slack demand for power generation capacity, we think investors should consider Adani Ports (APSE.NS, OW, 125.25 INR) which has strong earnings growth coming up, or even L&T (LART.BO, EW, 830.15 INR), which is undergoing a cyclical downturn at the moment.
No comments:
Post a Comment