In a recently held press conference, PSU engineering major, BHEL's management had released provisional numbers for the company's performance in FY05. As per the reported numbers, while sales have grown by around 21% YoY, net profits are up a strong 52%.
The strong growth in revenues in FY05 was coupled with a continued robust inflow of orders to BHEL's books. During the fiscal, the company recorded an order inflow of Rs 180 bn, a YoY growth of 9%. More importantly, a large part of the orders came in for EPC (engineering, procurement and construction) and turnkey contracts, which have a higher gestation period. At the end of the fiscal, BHEL's outstanding order books stood at Rs 318 bn, almost 3 times its FY05 revenues. Also, if one were to look at the right hand chart below, the implications of having a strong order inflow are clearly seen. BHEL's FY05 sales are around 50% of its FY05 received orders. Engineering companies generally have an order conversion cycle of 18 months and this indicates that BHEL has already secured a strong revenue flow for at least the next two years.
In line with the country's plans of putting up around 36,000 MW of generation capacity during the 10th five year plan (2002-07), the company is gearing up to enhance its annual manufacturing capacity from the present 6,000 MW to 10,000 MW by FY07. This would involve an investment of around Rs 8-10 bn. BHEL's installed capacity has grown YoY by 5% to 74,780 MW, and it has maintained its share of 65% of the country's total installed capacity of 115,356 MW.
At the current price of Rs 812, BHEL's stock trades at a price to earnings multiple of around 19.9 times FY05 earnings and a price to sales of 1.9 times FY05 sales. As a market leader in the power business and being a government company, we expect significant growth in the BHEL's power division in the next five years. Perhaps, this is one of the key reasons for high valuations, even when compared to global majors like ABB.
Having said that, our interaction with engineering majors like ABB suggest that order book position cannot rise at a much faster rate than what is executable and therefore, investors have to be realistic with respect to the order book growth. Unlike the past, most of the global engineering majors (upon reading their annual reports) are looking at India and China for growth opportunities, and competition, in this sense, is only going to increase.
BHEL has announced third quarter results for the financial year 2016-2017. The company has reported an 18% YoY growth in sales, and a Rs 875 million net profit during the period. Here is our analysis of the results.
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