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BHEL: Continues to impress - Views on News from Equitymaster
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BHEL: Continues to impress
Jan 21, 2011

BHEL declared its 3QFY11 results. The company has reported 24.6% YoY growth in sales while its net profits have grown by 30.8% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by about 24.6% YoY in 3QFY11. Growth aided by a 27.6% YoY increase in the company’s ‘Power’ segment. The "Industry" segment too recorded a decent growth of 18.9% YoY growth during the quarter.
  • Operating margins expand by 1.4% YoY during the quarter owing to a fall in both staff costs as well as raw material expenses (as percentage of sales).
  • Net profits increase by a healthy 30.8% YoY during the quarter. This is mainly due to the expansion in operating margins as also a lower effective tax rate. The bottom-line growth was partially impacted by increase in interest expenses coupled with decline in other income.

(Rs m) 3QFY10 3QFY11** Change 9MFY10 9MFY11 Change
Sales          71,003           88,493 24.6%          193,212        236,574 22.4%
Operating income               1,289              1,741 35.0%             3,070              4,576 49.1%
Expenditure           56,675           69,516 22.7%         162,427         194,459 19.7%
Operating profit (EBDITA)           15,617          20,717 32.7%            33,855            46,691 37.9%
Operating profit margin (%) 22.0% 23.4%   17.5% 19.7%
Other income              1,933              1,529 -20.9%               6,159              4,784 -22.3%
Interest                    69                  145 109.7%                  157                  242 54.3%
Depreciation              1,038              1,447 39.4%              2,933             4,057 38.3%
Profit before tax           16,443           20,655 25.6%            36,924           47,176 27.8%
Tax             5,717              6,623 15.8%            12,913           15,044 16.5%
Profit after tax/(loss)           10,726           14,032 30.8%            24,011            32,132 33.8%
Net profit margin (%) 15.1% 15.9%   12.4% 13.6%  
No. of shares                    489.5              489.5  
Diluted earnings per share (Rs)         65.6  
P/E ratio (x)*                        20.8  
* On a trailing 12-months basis   ** Change in revenue recognition boosted top-line by Rs 4440 m

What has driven performance in 3QFY11?
  • The 24.6% YoY growth in BHEL’s topline during 3QFY11 was largely a result of a robust performance from its ‘power’ segment’. The sales from the ‘power’ segment increased 27.6% YoY while the ‘industry’ segment grew at a slower pace of 18.9% YoY during the quarter. The company's order book at the end of the quarter stood at Rs 1,580 bn implying a book-to-bill ratio of 4.25 times TTM sales.

    Segment-wise performance
    (Rs m) 3QFY10 3QFY11 Change 9MFY10 9MFY11 Change
    Power            
    Revenue 57,087 72,820 27.6%         157,058         196,469 25.1%
    % share  76% 77%   77% 78%  
    PBIT margin 22.9% 22.4%   20.7% 21.3%  
    Industry            
    Revenue  18,020  21,429 18.9%  47,298  54,769 15.8%
    % share  24% 23%   23% 22%  
    PBIT margin 22.5% 21.2%   17.7% 17.0%  
    Gross Total*            
    Revenue 75,107  94,250 25.5%         204,356         251,239 22.9%
    PBIT margin 22.8% 22.1%   20.0% 20.3%  
    * Excluding inter-segment adjustments

  • BHEL’s operating margins expanded by 1.4% YoY during 3QFY11. This was largely due to a fall in staff costs as well as a fall in raw material expenses (as a percentage of sales).

  • The expansion in operating margins along with a lower effective tax rate led BHEL to post a growth in net profits of about 30.8% YoY during to quarter. However, other income declined by 20.9% YoY, and interest charges saw a surge of 109.7% YoY. These two factors impacted the bottomline performance which would have otherwise been even better.

What to expect?
At the current price of Rs 2179, the stock is trading at a multiple of 14.9 times our estimated FY13 earnings. The company is sitting on a healthy order book of Rs 1,580 bn at the end of 3QFY11 and the Management is optimistic of achieving the full year order inflow target of Rs 600 bn considering an uptick in capex cycle. However, execution issues and a slow power reform process due to tardy government policies continue to pose some downside risks. As a result we maintain our view on the stock. (Research Pro may click here)

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