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BHEL: 'Power'ful performance

Apr 6, 2004

On the back of increasing order intake from the power segment, accompanied by improving margins in the industrial segment, engineering major BHEL outperformed the Sensex significantly in the last one year. As can be seen from the graph below, Rs 100 invested in BHEL at the start of April last year would have appreciated to Rs 285 (185% return) currently, as compared to Rs 187 for the BSE-Sensex (87% return). Yesterday, the management of BHEL declared the provisional numbers for FY04. Let's have a look at the same.

As per provisional figures declared by the management, BHEL has witnessed a 15% growth in topline and a significant 38% increase in bottomline for the year ended March 2004. Due to the company's continuous efforts to rationalize work force, which now stands at 44,500 as compared to 45,500 in FY03, the value added per employee has increased from Rs 0.69 m to Rs 0.83 m (up 20%).

Provisional figures (Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
Gross turnover 31,484 41,973 33.3% 74,820 86,100 15.1%
PBT 6,296 6,571 4.4% 8,020 9,470 18.1%
PAT 3,761 4,763 26.6% 4,450 6,150 38.2%
Order Inflow (Rs bn) 29.5 39.7 34.5% 112.3 164.7 46.7%
EPS 61.5 77.8   18.2 25.1  
P/E         26.5  

On the back of huge order inflows worth Rs 165 bn this fiscal, up 46% YoY (last year Rs 112 bn), the outstanding orderbook size stands at Rs 237 bn, which is 2.8 times FY04 provisional gross sales. Break up of orderbook shows that power segment received orders worth Rs 127 bn, which is 79% higher YoY. On the other hand, the company's industrial segment witnessed a 23% YoY increase in the order inflow. The company's export division has received orders worth Rs 2.3 bn during the fiscal.

At PBIT level, the company's power division performance remained in line with the past trends (around 19% margins). But the industrial segment saw a significant improvement in PBIT margins (12% this year as compared to 8% in FY03). The management has not clarified the reasons for the higher margins as yet. But in our view, the probable reasons for this are declining manpower and BHEL's entry into higher margin businesses like water treatment projects. Just to put things in perspective, BHEL has pruned its employee numbers by over 27% in the last 5 years to 44,500 in FY04.

At the current price level of Rs 667, the stock trades at P/E multiple of 26.5x FY04 earnings. The market cap to sales ratio for the stock stands at 1.5x projected FY06 revenues, which are on the higher side of valuation band. Both private and state owned power companies in India are expected to add huge generation capacities, which will further provide strength of BHEL's orderbook size going forward. BHEL's track record of installing 65% of the India's thermal power generation capacity also speaks for its expertise in installing power plants. But as we have been saying earlier, there is price for every business. It seems that the stock price has factored in the future growth. Going by the valuation discipline, the stock looks fully valued at current juncture.

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