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BHEL: Order inflows a cause of concern - Views on News from Equitymaster

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BHEL: Order inflows a cause of concern
Jan 30, 2012

BHEL has announced third quarter results of financial year 2011-2012 (3QFY12). The company has reported 19.2% YoY growth in sales while its net profits have grown by 2.1% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by about 19.2% YoY in 3QFY12. Growth aided by a 58.3% YoY increase (low base effect) in the company's 'Power' segment. However, revenues from the 'Industry' segment declined 37.3% YoY.
  • Operating margins contract by 3.7% YoY during the quarter owing to a rise in other expenditure and raw material costs as a percentage of sales.
  • Net profits increase by 2.1% YoY during the quarter mainly due to rise in other income and fall in tax expenditure partially offset by increase in depreciation expenses.
  • The order book at the end of the quarter stands at Rs 1.46 tn, a decline of 9.0% on a sequential basis. The company did not manage to bag any material orders during the quarter. In fact, orders worth Rs 58.5 bn were cancelled amidst uncertainty in the business environment.

Financial performance snapshot
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Sales 88,493 105,480 19.2% 236,574 279,722 18.2%
Operating income  1,740 1,951 12.1% 4,576 5,878 28.5%
Expenditure 69,516 86,627 24.6% 194,459 234,071 20.4%
Operating profit (EBDITA) 20,717 20,804 0.4% 46,691 51,529 10.4%
Operating profit margin (%) 23.4% 19.7%   19.7% 18.4%  
Other income 1,530 1,960 28.1% 4,784 6,645 38.9%
Interest 145 145 0.0% 242 329 36.0%
Depreciation 1,447 1,861 28.6% 4,057 5,459 34.6%
Profit before tax 20,655 20,758 0.5% 47,176 52,386 11.0%
Tax 6,623 6,432 -2.9% 15,044 15,784 4.9%
Profit after tax/(loss) 14,032 14,326 2.1% 32,132 36,602 13.9%
Net profit margin (%) 15.9% 13.6%   13.6% 13.1%  
No. of shares         2,447  
Basic & Diluted earnings per share (Rs)         15.0  
P/E ratio (x)*         9.5  
* On a trailing 12-months basis

What has driven performance in 3QFY12?
  • The 19.2% YoY growth in BHEL's topline during 3QFY12 was largely a result of a robust performance from its 'Power' segment'. Revenues from the power segment increased 58.3% YoY. However, the increase should be seen in the light of lower base effect. Further, sales from the 'Industry' segment declined 37.3% YoY during the quarter.

  • The company did not bag any material orders during the quarter. In fact, there were order cancellations worth Rs 58.5 bn during the quarter amidst uncertain business environment. During 9MFY12, the company has managed to bag orders worth Rs 152 bn and has a full year inflow target of approximately Rs 660 bn. Considering the 9MFY12 performance and weak macro-environment, we believe that the full year order inflow guidance is at significant risk.

    Segment-wise performance
    (Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
    Power            
    Revenue 55,023 87,115 58.3% 179,303 222,891 24.3%
    % share 59% 79%   72% 76%  
    PBIT margin 31.1% 19.0%   23.4% 17.6%  
    Industry            
    Revenue 37,775 23,668 -37.3% 68,261 69,800 2.3%
    % share 41% 21%   28% 24%  
    PBIT margin 9.9% 31.6%   13.2% 27.5%  
    Gross Total*            
    Revenue 92,798 110,783 19.4% 247,564 292,691 18.2%
    PBIT margin 22.5% 21.7%   20.6% 20.0%  
    * Excluding inter-segment adjustments

  • BHEL's operating margins contracted by 3.7% YoY during 3QFY12. This was largely due to increase in other expenditure and raw material costs as a percentage of sales. While the raw material costs (including stock adjustments) increased by 270 bps on a YoY basis, other expenditure increased by 350 bps.

  • Net profits increased by 2.1% YoY. Muted performance at the operating level and increase in depreciation expenses took a toll on profits. However, decline in tax expenditure and increase in other income helped the company post modest growth in profits.

What to expect?
While order inflows over the last few quarters have remain muted, the performance in the current quarter was extremely disappointing as order cancellations worth Rs 58.5 bn effectively meant inflows turned negative (no material orders bagged during the quarter) after many years. Further, rising competition and pricing pressure raises concerns over future orders as well. Nonetheless, considering that the company's TTM book-to-bill ratio is approximately 3.1 times, near term revenue visibility remains intact.

Considering the recent performance order inflow guidance for the full year is under significant threat and the market is precisely worried about that. Further, as majority of the backlog caters to the power segment, execution worries also remain. Nonetheless, we believe that trough valuations at 9.5x TTM earnings discount these concerns. As a result, we maintain our positive view on the stock.

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