IIFL Institutional Equities, a part of the IIFL Group, one of the leading players in the Indian financial services space, recommends ‘Sell’ on BHEL.
IIFL said, “While we were convinced about the medium-term earnings decline extending beyond FY18, the deterioration is earlier and steeper than we had expected”.
The brokerage stated that coupled with sharper-than-expected 360bps YoY Ebitda margin contraction despite stable staff costs, our estimates of moderation in revenue growth and earnings decline from FY14 onwards will likely advance by a year. We cut our FY13-14 estimates by 8-10%.
According to IIFL report, against consistent yearly free cash generation of Rs8-32bn over the past decade, BHEL used up Rs60bn cash during 9MFY12. Cash depleted by ~Rs30bn in 3Q alone. Working capital has more than trebled over 9MFY12 driven not only by lack of customer advances but also by higher receivables. Receivables increased by 37 days during the period.
Concerns on lack of order inflows and delays in existing orders are well known. But zero order inflows and cancellations totalling Rs58.5bn in 3Q are poorer than our worst-case expectations. 58% YoY decline in gross inflows and 74% net decline during 9MFY12 have resulted in end-3Q order book declining 7.3% YoY, report added.
The report was published by IIFL’s Institutional Equities Research desk.