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BHEL: Lower costs boost profits
Jan 21, 2010

Performance summary
  • Sales grow by about 18% YoY in 3QFY10. Growth aided by an 19% YoY increase in the company’s ‘Power’ segment.
  • Operating margins expand by 2.9% YoY during the quarter owing to fall in raw material costs and other expenditure (as percentage of sales).
  • Net profits increase by a robust 36% YoY during the quarter. This is mainly due to the expansion in operating margins.
  • Order backlog stands at Rs 1,340 bn at the end of December 2009.
  • Declares an interim dividend of Rs 11 per share.


Financial performance snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Sales 61,488 72,292 17.6% 160,085 196,282 22.6%
Expenditure 50,016 56,675 13.3% 135,890 162,427 19.5%
Operating profit (EBDITA) 11,473 15,617 36.1% 24,195 33,855 39.9%
Operating profit margin (%) 18.7% 21.6%   15.1% 17.2%  
Other income 1,797 1,933 7.6% 5,908 6,159 4.2%
Interest 179 69 -61.4% 226 157 -30.6%
Depreciation 865 1,038 20.0% 2,334 2,933 25.7%
Profit before tax 12,226 16,443 34.5% 27,543 36,924 34.1%
Tax 4,321 5,717 32.3% 9,636 12,913 34.0%
Profit after tax/(loss) 7,906 10,726 35.7% 17,907 24,011 34.1%
Net profit margin (%) 12.9% 14.8%   11.2% 12.2%  
No. of shares       489.5 489.5  
Diluted earnings per share (Rs)*         76.6  
P/E ratio (x)*         30.0  
* On a trailing 12-months basis

What has driven performance in 3QFY10?
  • The 18% YoY growth in BHEL’s topline during 3QFY10 was largely a result of a decent performance from its ‘power’ segment, which grew sales by 19% YoY. The ‘industry’ segment grew at a slower pace of 3% YoY during the quarter. Within the industry sector, the company has been focusing on the transportation segment (locomotives) in a big way. The industry segment contributed to 24% of the company’s total sales during the quarter (about 27% in 3QFY09). At the end of December 2009, the company’s order backlog stood at Rs 1,340 bn, which stands at about 4.8 times its FY09 annual sales. BHEL continues to bag big orders. During the quarter, the value of order inflows stood at about Rs 160 bn.

    Segment-wise performance
    (Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
    Power            
    Revenue 48,189 57,087 18.5% 127,366 157,058 23.3%
    % share 73.3% 76.0%   73.7% 76.9%  
    PBIT margin 14.8% 22.9%   16.7% 20.7%  
    Industry            
    Revenue 17,522 18,020 2.8% 45,334 47,299 4.3%
    % share 26.7% 24.0%   26.3% 23.1%  
    PBIT margin 12.7% 22.5%   13.9% 17.7%  
    Gross Total*            
    Revenue 65,711 75,107 14.3% 172,700 204,357 18.3%
    PBIT margin 14.2% 22.8%   16.0% 20.0%  
    * Excluding inter-segment adjustments

  • BHEL is currently in the final stages of expanding its manufacturing capacity from 10,000 MW per annum for power plant equipment to 15,000 MW per annum. This additional capacity is expected to be available and ready by the end of FY10. The additional capacity will be mostly be towards increasing the thermal power plants business. The management has indicated of a capex of Rs 42 bn during the entire eleventh five-year plan (FY08 to FY12), with about Rs 19 bn that will be spent towards the same in FY11.

  • BHEL’s operating margins expanded by 2.9% YoY during 3QFY10. This was largely due to a fall in the cost of raw materials coupled with a fall in other expenditure (as a percentage of sales). BHEL’s management has indicated that this favourable trend (lower input costs) is expected to continue for some more quarters. The fall is mostly due to the fact that the inventory of raw materials used is with a lag of about 6 months. The prices at that time were still low and thus the lower costs. The recent increase in prices of key commodities will take some time before its shows up in the company’s numbers.

  • The expansion in operating margins along with lower interest costs led BHEL to post a growth in net profits of about 36% YoY during to quarter, much higher than its topline growth of 17.6% YoY.

What to expect?
At the current price of Rs 2,294, the stock is trading at a multiple of 20.7 times our estimated FY12 earnings. BHEL’s topline performance during the first nine months has been marginally higher than our estimates. In the management’s view, the company is on track to achieve its sales guidance of Rs 320 bn for the full year FY10, which in all probability is achievable. However, considering the stock’s expensive valuations, we reiterate our negative view on the stock.

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