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BHEL: A weak quarter

Feb 1, 2013

BHEL has announced third quarter results of financial year 2012-2013 (3QFY13). The company has reported 4.7% YoY and 17.5% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales decline by 4.7% YoY in 3QFY13. Revenues from both power and industry segment decline 4.6% YoY and 5.5% YoY respectively.
  • Operating profits decline by 19.8% YoY during the quarter. Operating margins fell from 19.1% in 3QFY12 to 16.0% in 3QFY13.
  • In line with operating profits, net profits decline by 17.5% YoY during the quarter. Rise in interest expenses (up 251% YoY) and depreciation expenses (18.1% YoY) impacted the profitability.
  • The order book at the end of the quarter stands at Rs 1,137 bn.
  • The company declared an interim dividend of Rs 2.1 per share during the quarter.

Financial performance snapshot
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Sales 105,410 100,416 -4.7% 279,635 287,675 2.9%
Operating income 1,183 1,781 50.5% 3,881 4,528 16.7%
Expenditure 86,221 85,856 -0.4% 234,343 244,821 4.5%
Operating profit (EBDITA) 20,372 16,341 -19.8% 49,173 47,382 -3.6%
Operating profit margin (%) 19.1% 16.0%   17.3% 16.2%  
Other income 2,392 3,324 39.0% 9,001 8,293 -7.9%
Interest 145 509 251.0% 329 847 157.4%
Depreciation 1,861 2,198 18.1% 5,459 6,645 21.7%
Profit before tax 20,758 16,958 -18.3% 52,386 48,183 -8.0%
Tax 6,432 5,139 -20.1% 15,784 14,411 -8.7%
Profit after tax/(loss) 14,326 11,819 -17.5% 36,602 33,772 -7.7%
Net profit margin (%) 13.4% 11.6%   12.9% 11.6%  
No. of shares         2,447  
Basic & Diluted earnings per share (Rs)         13.8  
P/E ratio (x)*         8.1  
* On a trailing 12 month basis

What has driven the performance in 3QFY13?
  • BHEL's topline declined 4.7% YoY during 3QFY13 largely due to a result of 4.6% YoY fall in revenues from the power segment. Revenues from the industry segment also declined 5.5% YoY.

  • It may be noted that apart from ongoing execution issues, sales growth was impacted as the company deliberately held back dispatches of equipments since debtor liquidation is taking longer than usual. Visa Power and Indiabulls Power are the two companies to which BHEL withheld supplies recently.

  • The current order book stands at Rs 1,137 bn. Roughly 79% of the order book is from power sector. The company registered an order inflow of Rs 19.8 bn in 3QFY13. However, it may be noted that in January itself, the company won orders worth Rs 50 bn. During the 9MFY13 period total order inflow stood at Rs 106.9 bn.

    Segment-wise performance*
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Power
    Revenue 87,115 83,076 -4.6% 222,891 240,375 7.8%
    % share 79% 79%   76% 79%  
    PBIT margin 19.0% 18.3%   17.6% 18.7%  
    Industry
    Revenue 23,668 22,365 -5.5% 69,800 62,631 -10.3%
    % share 21% 21%   24% 21%  
    PBIT margin 31.6% 18.3%   27.5% 20.1%  
    Gross Total*
    Revenue 110,783 105,441 -4.8% 292,691 303,006 3.5%
    PBIT margin 21.7% 18.3%   20.0% 19.0%  
    * Excluding inter-segment adjustments & Excise Duty

  • BHEL's operating margins declined by 310 bps during 3QFY13. Operating profits, too, declined by 19.8% YoY. Margins from both power and industry segment declined during the quarter. In fact, for the industry segment margins fell from 31.6% in 3QFY12 to 18.3% in 3QFY13. Margins from the industry segment tend to be volatile as there are many short cycle orders in it. Thus, if the execution of short cycle orders happen in a particular quarter margins tend to be higher and vice-versa.

  • Net profits declined by 17.5% YoY. This was mainly due to poor performance at the operating level and rise in interest expenses. The interest expenses increased 251% YoY during the quarter. However, other income increased by 39.0% YoY due to exchange rate variation. But it was not sufficient to arrest the fall in profits.

What to expect?
The current quarter was a disappointing one for BHEL. While both topline and bottomline declined margins were also subdued. On the other hand, order inflows were also muted. However, in the month of January, company received orders worth Rs 50 bn. This was more than the entire order inflow registered in the 3QFY13 (Rs 19.8 bn) signifying that the overall ordering environment is improving. For the full year, management expects order inflow to be in the region of Rs 250-300 bn.

Considering the slowdown in the industry the next 2-3 quarters could be challenging for BHEL. However, we feel that most of the pain is already into the price. As the order intake and working capital cycle improves, the stock can register a bounce back. And there are already some signs of improvement in order intake as the company is L1 in many orders. Working capital is also expected to show signs of improvement as cash collection has been 18% more than what was prevailing in the last year. Thus, considering the long term prospects, attractive valuations and strong cor-relation between power sector and India growth story, we maintain our Buy rating on the stock.

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