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BHEL: Powering ahead - Views on News from Equitymaster
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BHEL: Powering ahead
Jan 28, 2008

Performance summary
  • Sales grow 14% YoY in 3QFY08, 18% YoY in 9mFY08. Growth led by 19% YoY growth in ‘power’ segment sales during the quarter.
  • Operating margins contract by 1.3%, owing to higher staff costs and stock related adjustments (both as percentage of sales).

  • Net profits grow by 16% YoY in 3QFY08, 38% YoY in 9mFY08. Lower interest costs and higher other income help bottomline grow at a stronger rate than topline.

  • Order backlog stood at Rs 780 bn (4.5 times FY07 sales) at the end of December 2007.

Financial performance: A snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 43,397 49,642 14.4% 103,178 121,634 17.9%
Expenditure 34,105 39,666 16.3% 86,141 101,600 17.9%
Operating profit (EBDITA) 9,292 9,976 7.4% 17,037 20,034 17.6%
Operating profit margin (%) 21.4% 20.1%   16.5% 16.5%  
Other income 1,855 2,649 42.8% 4,755 9,721 104.4%
Interest 120 98 -18.3% 387 312 -19.4%
Depreciation 662 762 15.1% 1,967 2,145 9.0%
Profit before tax 10,365 11,765 13.5% 19,438 27,298 40.4%
Tax 3,688 4,046 9.7% 6,795 9,813 44.4%
Profit after tax/(loss) 6,677 7,719 15.6% 12,643 17,485 38.3%
Net profit margin (%) 15.4% 15.5%   12.3% 14.4%  
No. of shares         489.5  
Diluted earnings per share (Rs)*         59.2  
P/E ratio (x)*         34.9  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • BHEL grew its topline by 14% YoY during 3QFY08. This growth was aided especially by the company’s ‘Power’ division (75% of 3QFY08 total sales), which grew by 19% YoY. Growth for this segment has been led by execution of a part of the huge existing backlog plus strong order inflows during the third quarter. At the end of December 2007, BHEL’s order backlog stood at Rs 780 bn (4.5 times FY07 sales), which indicates strong visibility into the future.

    During the quarter, BHEL completed the expansion of its manufacturing facilities to bring them to 10,000 MW per year levels, from 6,000 MW earlier. The company shall now be pursuing an expansion up to 15,000 MW, which is expected to complete in the first half of 2010. During this period, the management has also talked about its target of achieving sales growth of 20% per annum, which shall take its topline to nearly Rs 450 bn (FY07 sales of Rs 188 bn). We expect the company to grow its sales at a compounded annual rate of 32% during the period FY07 to FY10, led by capacity expansion and execution of the existing order backlog.

    Segment-wise performance
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Power            
    Revenue 35,387 42,046 18.8% 84,355 102,447 21.4%
    % share 73.5% 74.5%   73.2% 74.0%  
    PBIT margin 23.9% 20.5%   21.7% 21.1%  
    Industry            
    Revenue 12,741 14,354 12.7% 30,846 35,974 16.6%
    % share 26.5% 25.5%   26.8% 26.0%  
    PBIT margin 12.3% 17.2%   10.4% 12.7%  
    Gross Total*            
    Revenue 48,128 56,400 17.2% 115,201 138,421 20.2%
    PBIT margin 20.8% 19.6%   18.7% 18.9%  
    * Excluding inter-segment adjustments

  • BHEL recorded a 1.3% contraction in operating margins during 3QFY08. This was largely due to increase in its staff costs, which moved up from 11.8% of sales in 3QFY07 to 15% in 3QFY08. On a nine-months basis, the company has been able to maintain its operating margins at 16.5%. As a matter of fact, on the back of economies of scale, BHEL has been able to shore up its profitability over the past few years, a trend which we see continuing during the period FY07 to FY10 as well. Backed by its size and requirements, the company has been more successful than its peers in negotiating raw material costs in the past, which we believe has been a source of competitive advantage.

  • Higher other income and lower interest costs have helped BHEL grow its net profits at rates higher than the topline growth during both 3QFY08 and 9mFY08. In fact, during 9mFY08, the company more than doubled its other income, largely aided by a large income tax refund (Rs 2.7 bn) received during the previous quarter (2QFY08).

What to expect?
At the current price of Rs 2,065, the stock is trading at a multiple of 14.8 times our estimated FY10 earnings, which we believe makes the stock attractive from a long-term investment perspective. The fact that BHEL continues to build upon its order book provides strong visibility into future growth. Over that, economies of scale shall also help the company ramp up its profitability in the future. Also, the fact that the capacity expansion is on schedule is a positive. However, the downside risks in terms of timely execution of projects, volatile raw material prices and manpower issues persist.

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