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BHEL: Material costs suppress margins - Views on News from Equitymaster
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BHEL: Material costs suppress margins
Jan 30, 2009

Performance summary
  • Sales grow 21% YoY in 3QFY09, aided by similar growth in both power and industry segments.
  • Operating margins contract by a huge 3.2% YoY during the quarter owing to big spike raw material costs (as percentage of sales).
  • Net profits increase by a meager 2.4% YoY during the quarter, mainly due to the shrinkage in operating margins and increased interest costs.
  • Order backlog stands at Rs 1,135 bn at the end of December 2008.
  • Declares an interim dividend of Rs 9 per share


Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Sales 49,642 60,223 21.3% 121,634 156,941 29.0%
Expenditure 39,666 50,016 26.1% 101,600 135,890 33.8%
Operating profit (EBDITA) 9,976 10,207 2.3% 20,034 21,051 5.1%
Operating profit margin (%) 20.1% 16.9%   16.5% 13.4%  
Other income 2,649 3,063 15.6% 9,721 9,052 -6.9%
Interest 98 179 82.7% 312 226 -27.6%
Depreciation 762 865 13.5% 2,145 2,334 8.8%
Profit before tax 11,765 12,226 3.9% 27,298 27,543 0.9%
Tax 4,046 4,320 6.8% 9,813 9,636 -1.8%
Profit after tax/(loss) 7,719 7,906 2.4% 17,485 17,907 2.4%
Net profit margin (%) 15.5% 13.1%   14.4% 11.4%  
No. of shares       489.5 489.5  
Diluted earnings per share (Rs)*         59.3  
P/E ratio (x)*         22.3  
* On a trailing 12-months basis

What has driven performance in 3QFY09?
  • The 21% YoY growth in BHEL’s topline during 3QFY09 was largely a result of a strong performance from its ‘industry’ segment, which grew sales by 22% YoY. Within the industry sector, the company is focusing on the transportation sector (locomotives) in a big way. The industry segment contributed to 27% of the company’s total sales during the quarter (26% in 3QFY08). The key business segment of ‘power’ grew by 15% YoY during 3QFY09. At the end of December 2008, the company’s order backlog stood at Rs 1,135 bn, over 5 times its FY08 annual sales. BHEL continues to bag big orders, as can being seen by the strong Rs 152 bn of order inflows during the quarter.

    Segment-wise performance
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Power            
    Revenue 42,046 48,189 14.6% 102,447 127,365 24.3%
    % share 74.5% 73.3%   74.0% 73.7%  
    PBIT margin 20.5% 14.8%   21.1% 16.7%  
    Industry            
    Revenue 14,354 17,522 22.1% 35,974 45,334 26.0%
    % share 25.5% 26.7%   26.0% 26.3%  
    PBIT margin 17.2% 12.7%   12.7% 13.9%  
    Gross Total*            
    Revenue 56,400 65,711 16.5% 138,421 172,699 24.8%
    PBIT margin 19.6% 14.2%   18.9% 16.0%  
    * Excluding inter-segment adjustments

  • BHEL currently has a manufacturing capacity of 10,000 MW per annum for power plant equipment. It is further enhancing the same to 15,000 MW per annum to be completed by December 2009. 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 eleventh five-year plan (FY08 to FY12).

  • BHEL’s operating margins declined by 3.2% YoY during 3QFY09. This was largely due to a big spike in the cost of raw materials coupled with a marginal increase in its staff costs on account of an additional provision for wage revision. Raw materials costs increased from 57.4% of sales in 3QFY08 to 67.4% in 3QFY09. BHEL’s management has expressed its intention of ending the full year FY09 with raw materials as a percentage of sales at 60%. The spike is mostly due to the fact that the inventory of raw materials used is with a lag of about 3 to 4 months. The prices at that time were still high and thus the higher costs. The recent fall in prices of key commodities is expected to show in the next quarter results.

  • The contraction in operating margins along with higher interest costs led BHEL to post a growth in net profits of only 2% YoY during to quarter. Interest costs saw a jump of 83% YoY during the quarter.

What to expect?
At the current price of Rs 1,319, the stock is trading at a multiple of 13.8 times our estimated FY11 earnings. BHEL’s topline performance during the first nine months has been in line with our full year estimates. The management has also set a target of 30% full year sales growth for FY09, which we believe is achievable. However, the company is likely to under-perform our full year operating margins estimate, which are anyways conservative. Given the stock’s attractive valuations, we maintain our positive view on the same from a 2 to 3 years perspective.

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