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BHEL: Poor show continues
Feb 5, 2014 | Updated on Feb 8, 2014

Bharat Heavy Electricals (BHEL) has announced third quarter results of financial year 2013-2014 (3QFY14). The company has reported 15.7% YoY and 41.2% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales decline by 15.7% YoY in 3QFY14.
  • Operating profits decline by 39.7% YoY during the quarter due to poor performance at the topline level. Operating margins dive to 11.4% in 3QFY14 from 16.0% in 3QFY13.
  • In line with operating profits, net profits decline by 41.2% YoY during the quarter. Poor performance at the operating level more than offset the decline in interest (-36.6% YoY) expenses leading to decline in net profits.
  • The order book at the end of the quarter stands at Rs 1,006 bn.
  • The company declared an interim dividend of Rs 1.31 per share during the quarter.

Financial performance snapshot
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Sales 100,417 84,624 -15.7% 287,675 236,339 -17.8%
Operating income  1,781 1,725 -3.1% 4,528 4,434 -2.1%
Expenditure 85,857 76,489 -10.9% 244,821 222,909 -9.0%
Operating profit (EBDITA) 16,341 9,859 -39.7% 47,382 17,865 -62.3%
Operating profit margin (%) 16.0% 11.4%   16.2% 7.4%  
Other income 3,324 2,908 -12.5% 8,293 13,272 60.0%
Interest 509 323 -36.6% 847 847 0.0%
Depreciation 2,198 2,416 9.9% 6,645 7,111 7.0%
Profit before tax 16,957 10,028 -40.9% 48,183 23,178 -51.9%
Tax 5,139 3,080 -40.1% 14,411 7,016 -51.3%
Profit after tax/(loss) 11,819 6,948 -41.2% 33,772 16,162 -52.1%
Net profit margin (%) 11.6% 8.0%   11.6% 6.7%  
No. of shares         2,447  
Basic & Diluted earnings per share (Rs)         6.6  
P/E ratio (x)*         8.1  
* On a trailing 12 month basis

What has driven performance in 3QFY14?
  • BHEL's sales have declined by 15.7% YoY for the quarter on account of slow pace of execution. Revenues from the power segment declined 11.8% YoY while that from the industry segment declined 28.5% YoY.

  • BHEL's total material cost as a percentage of sales increased this quarter to 58.4% from 55.6% in 3QFY13. Also, staff cost increased from 14.3% in 3QFY13 to 18.0% in 3QFY14. Increase in raw material cost and staff expenses coupled with fall in topline led to a 39.7% YoY fall in operating profits.

  • EBIT margin for the power segment stands at 16.5% while that from the industry segment stands at 14.5%. Increasing cost and poor execution has led to decline in margins in both the segments. Also, it may be noted that industry segment's margins are quite volatile and depend upon the order mix.

  • BHEL commissioned 3,176 MW of capacity until December 2013 and another 2,820 MW is ready for capacity addition.

  • The net profits of the company declined 41.2% YoY in 3QFY14. Poor performance at the operating level led to fall in profits. In 3QFY14, net margins stood at 8.0% as compared to 11.6% in 3QFY13.

    Segment-wise performance
    (Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
    Power
    Revenue 83,030 73,196 -11.8% 240,266 202,746 -15.6%
    % share 79% 82%   79% 81%  
    PBIT margin 18.3% 16.5%   18.7% 15.1%  
    Industry
    Revenue 22,365 15,999 -28.5% 62,631 46,317 -26.0%
    % share 21% 18%   21% 19%  
    PBIT margin 18.3% 14.5%   20.1% 7.7%  
    Gross Total*
    Revenue  105,395 89,195 -15.4% 302,897 249,063 -17.8%
    PBIT margin 18.3% 16.1%   19.0% 13.7%  
    * Excluding inter-segment adjustments & Excise Duty
What to expect?
At the current price of Rs 160, the stock is trading at a multiple of 8.1x its trailing twelve month earnings. This was the third consecutive quarter of weak performance by BHEL. Both sales and profits declined with margins witnessing strong erosion. Slower execution especially due to delays from the client side is the primary reason for poor performance.

Apart from that, receivable pile-up is another area of concern. Roughly 390 bn of receivables are overdue for payments with more than 50% of debtors being in the books for more than a year. While there were fears that some of them will have to be written off management indicated that recovery will happen but may take some time. It has already taken steps to recover the pending dues with debtor liquidation cycle speeding up during 9MFY14.

With slowdown in the power sector order inflows have also taken a hit. While management indicated that 17 GW of orders are under the finalization stage, competition is likely to be stiff if they hit the street anytime soon, considering the overcapacity in industry and dearth of order inflows. Factors such as poor revenue visibility on account of fall in order book and temporary execution issues will continue to hamper BHEL's performance for few more quarters to come. In light of this, we may have to revisit our estimates for the stock. Until then we maintain our HOLD view.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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