Bhel: March quarter magic!

India's No. 1 engineering behemoth, Bharat Heavy Electricals Limited (Bhel), continued its journey towards recovery. As per the detailed figures released by the management, Bhel recorded the highest ever net sales of Rs 68,505 m (up 14% YoY) in FY02. More importantly, it earned Rs 4.5 bn as net profit during the period (up 44% YoY).

(Rs m)	4QFY01	4QFY02	Change	FY01	FY02	Change
Net sales	27,471	30,612	11.4%	59,986	68,505	14.2%
Other Income	1,373	542	-60.5%	2,414	1,645	-31.9%
Expenditure	23,070	24,313	5.4%	55,881	58,904	5.4%
Operating Profit (EBDIT)	4,401	6,299	43.1%	4,105	9,601	133.9%
Operating Profit Margin (%)	16.0%	20.6%		6.8%	14.0%
Interest	293	343	17.1%	438	1,057	141.3%
Depreciation	382	394	3.1%	1,578	1,691	7.2%
Profit before Tax	5,099	6,104	19.7%	4,503	8,498	88.7%
Deffered revenue exp. write off	317	617	94.6%	1,562	1,997	27.8%
Tax	-185	1,998		-185	1,998
Profit after Tax/(Loss)	4,967	3,489	-29.8%	3,126	4,503	44.0%
Net profit margin (%)	18.1%	11.4%		5.2%	6.6%
No. of Shares (m)	244.8	244.8		244.8	244.8
Diluted Earnings per share*	81.2	57.0		12.8	18.4
Current P/E ratio (x)		2.9			9.1
*(annualised)

Profit before tax rose by a significant 89% YoY to 8.5 bn. Operating margins more than doubled to 14% during the year. Bhel recorded over 11% growth in 4QFY02 topline and a 30% drop in bottomline YoY. However, the bottomline performance in 4QFY02 is not comparable with last year, as the March quarter in FY01 witnessed exceptional turnaround in fortunes.

Bhel also secured the highest ever orders worth Rs 98.4 bn (up 77% YoY) from domestic and overseas markets during the year, despite subdued trend in power as well as industrial sectors of the country. Cumulative orders in hand, for execution in future years, stand at over Rs 120 bn at the end of FY02. 

(Rs m)	FY01	FY02	Change
Orders inflow	55,570	98,360	77.0%
Value added per employee	0.51	0.65	26.7%
Megawatt commissioned (MW)	2,914	2,165	-25.7%

During the year, the company added 26 sets constituting 2165 MW in the country. In the utility segment, Bhel exceeded CEA's commissioning target by 20%. With this, the installed capacity of Bhel utility sets went up to 66,917 MW, and consequently, the company maintained its share of 65% in the country's total installed capacity. Another encouraging factor is that the company has continued its relentless employee rationalisation drive. Its employee numbers have come down from over 62,000 in FY99 to 48,000 currently.

Though the performance has been very good, Bhel continues to record a bulk of its earnings in the March quarter (4Q). In FY01, the company had declared losses to the tune of Rs 1.8 bn in the first nine months of the year (April-December 2000). It then recorded a stupendous comeback logging Rs 4.9 bn as net profit in the March quarter alone (January-March 2001), thus finishing FY01 with a face saving Rs 3.1 bn earnings. In FY02 too, the trend is similar. In the first nine months (April-December 2001) Bhel declared a little over Rs 1 bn as net profits. It is the March quarter that has proved to be the saving grace this year too, with over 3.4 bn as earnings.

This skewness towards the 4QFY02 can be partly explained by the fact that Bhel executes large projects and earnings sway as and when these projects actually get finished. So, it is quite possible that a bulk of its orders got executed in March quarter thus giving it such growth. With over Rs 120 bn in orders, Bhel looks set for a vibrant FY03, though we suspect the earnings may continue to sway from one extreme to the other in future too.

We had projected a conservative 12% growth in sales and Rs 4.2 bn as net profits. Bhel has just about managed to beat these projections. At the current price of Rs 167 the stock trades at 9x FY02 earnings. Though FY03 looks very promising for Bhel, its sheer size and PSU nature will temper the positive sentiment in the long term. Also, with the focus of the power policy shifting from generation to T&D, Bhel will have to refocus its strengths on this segment.