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BHEL: Project delays continue to mar performance - Views on News from Equitymaster
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BHEL: Project delays continue to mar performance
Mar 9, 2015

BHEL has announced third quarter results for the financial year 2014-2015. The company has reported 28% YoY decline in sales. Profit after tax dropped by 69% YoY. Here is our analysis of the results.

Performance summary
  • Net sales for the company declined by 28% YoY in 3QFY15.
  • Operating profits declined by 70% YoY during the quarter.
  • EBITDA margin for the company decreased to 4.7% in 3QFY15 vs. 11.4% in 3QFY14.
  • Net profit for the quarter dropped 69% YoY.
  • The company ended the quarter with an order book of Rs 1,039 bn.
  • The company has announced an interim dividend of Rs 0.54 per share

Standalone Financial performance
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Sales 84,624 60,784 -28.2% 236,339 171,735 -27.3%
Other operating income  1,725 1,196 -30.7% 4,434 3,234 -27.1%
Expenditure 76,489 59,060 -22.8% 222,909 166,937 -25.1%
Operating profit (EBDITA) 9,859 2,920 -70.4% 17,865 8,033 -55.0%
Operating profit margin (%) 11.4% 4.7%   7.4% 4.6%  
Other income 2,908 2,741 -5.7% 13,272 8,180 -38.4%
Interest 323 52 -83.8% 847 651 -23.1%
Depreciation 2,416 2,546 5.4% 7,111 7,952 11.8%
Profit before tax 10,028 3,062 -69.5% 23,178 7,610 -67.2%
Tax 3,080 936 -69.6% 7,016 2,300 -67.2%
Profit after tax/(loss) 6,948 2,126 -69.4% 16,162 5,309 -67.1%
Net profit margin (%) 8.0% 3.4%   6.7% 3.0%  
No. of shares         2,448  
Basic & Diluted earnings per share (Rs)*         9.7  
P/E ratio (x)*         26.5  
* On a trailing 12-months basis

What has driven performance in 3QFY15?
  • Revenues of the power segment saw a significant decline of 34% YoY. Considering that they contribute a large 77% of total sales, this is the segment that dragged the overall performance down during the quarter. The industry segment's sales fell by a slower 7% YoY.

  • The fall in operating margins along with a rise in depreciation charges is what led to the bottom line falling by 69% YoY during the quarter.

  • Order inflows for the company were Rs 66 bn; 7% lower than in the previous year's quarter.

    Segment-wise performance
    (Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
    Power
    Revenue 73,196 48,624 -33.6% 202,746 137,435 -32.2%
    % share  82% 77%   81% 77%  
    PBIT margin 16.5% 9.4%   15.1% 12.0%  
    Industry
    Revenue 15,999 14,931 -6.7% 46,317 42,085 -9.1%
    % share  18% 23%   19% 23%  
    PBIT margin 14.5% 0.4%   7.7% 1.8%  
    Gross Total*
    Revenue 89,195 63,555 -28.7% 249,063    179,520 -27.9%
    PBIT margin 16.1% 7.3%   13.7% 9.6%  
    * Excluding inter-segment adjustments & Excise Duty
What to expect?
Slow execution and the consequent project delays and elongated billing cycles amid sluggish economic environment especially for large projects continue to mar the performance of the company.

The management is of the firm belief that the government's initiatives like 'Make in India', smart cities, dedicated freight corridors, 24/7 power supply, focus on ease of doing business, domestic production of defense equipment, urban transportation, modernisation of railways, focus on water management, aggressive investment in renewable etc. are all bound to revive the industrial capital expenditure. Consequently this will also mean a revival for the capital goods demand in the country.

The currently in progress process of re-allocation of coal mines is a big positive as far as fuel availability is concerned, which is also expected to benefit the power industry among others, the latter being a sector from which the company derives the largest chunk of its revenues. The management has indicated that defense related sectors are also seeing activity.

Overall, the management is hopeful of a recovery in the near future. Putting a precise time frame to this however continues to be a tricky affair.

At the current price of Rs 257, the stock is trading at a P/E multiple of 10.7 times our estimated FY17 earnings. Considering these valuation, we continue to maintain a Hold view on the stock.

However, 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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