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Bhel: Signs of healthy FY04

May 2, 2003

Engineering major, Bharat Heavy Electricals Limited's (Bhel) March quarter numbers show a 2% topline and 3% bottomline growth. The performance may look lacklustre, but the fourth quarter, as usual has contributed a bulk of the company's overall FY03 performance. Over 45% of Bhel's FY03 sales and nearly 73% of profits have been contributed by the 4QFY03 numbers. In effect, Bhel's March quarter magic continues.

(Rs m)4QFY024QFY03ChangeFY02FY03Change
Net Sales30,90531,4841.9%68,79869,7821.4%
Other Income7641,12547.3%1,8672,28422.3%
Operating Profit (EBDIT)6,1225,848-4.5%9,4239,360-0.7%
Operating Profit Margin (%)19.8%18.6%13.7%13.4%
Interest 256163-36.3%970526-45.8%
Profit before Tax6,2356,2961.0%8,6289,2407.1%
Deffered revenue exp. write off-620-384--2,000-1,535-
Profit after Tax/(Loss)3,6653,7612.6%4,6795,17110.5%
Net profit margin (%)11.9%11.9%6.8%7.4%
No. of Shares (eoy) (m)244.8244.8244.8244.8
Diluted Earnings per share*59.961.519.121.1
P/E Ratio3.811.1

In FY03, Bhel has reported just over 1% topline growth and nearly 11% net profit growth. Considering the big base of the company, the performance can be considered satisfactory. Moreover, the company has stated that due to the situation in Iraq, equipment worth Rs 1,340 m could not be shipped and another shipment of Rs 730 m was delayed. These two shipments will now be accounted for in the June quarter (i.e. 1QFY04).

Segment revenue snapshot
(Rs m)4QFY024QFY03ChangeFY02FY03Change
% of sales68.3%66.8%68.8%67.1%
% of sales31.7%33.2%31.2%32.9%
Total gross revenues36,684 36,240 -1.2%78,357 80,090 2.2%
Inter-segmental revenue2,6441,249-2,6443,052-
Net sales34,04034,9912.8%75,71377,0381.8%

The operating margins of the company dipped marginally, both in the quarter as well as in FY03. The power industry contributed over 67% to Bhel's topline in FY03. The revenues from this segment were largely stagnant as compared to FY02. The EBIT from the sector came down marginally to just over 22%. The industry segment grew by over 3% in 4QFY03, thus ensuring an 8% overall segment growth in FY03. Healthy EBIT margins saw the segment performing well in FY03. In effect, since nearly 70% of the business was lacklustre during the year, the company as whole did not do too well.

EBIT break-up
(Rs m)4QFY024QFY03ChangeFY02FY03Change
EBIT as % of power sales25.6%24.6%22.6%22.4%
EBIT as % of industry sales11.1%15.2%10.0%9.9%
Total EBIT7,6977,7711.0%14,62314,6400.1%
Less: Interest256163-36.3%970526-45.8%
-Other unallocable interest net of income1,2061,3128.8%5,0254,874-3.0%
-Deferred Revenue Exp.620384-38.1%2,0001,535-23.3%
Total PBT5,6155,9125.3%6,6287,70516.2%

Despite the somewhat lacklustre performance of the company, we are confident that FY04 will be a strong year for Bhel. The reason being that at the end of FY03, Bhel's outstanding orderbook stood at Rs 158 bn, which is more than double its FY03 revenues. Had it not been for the delay in shipments of over Rs 2 bn, Bhel's performance would have improved a little more in FY03. We had estimated Bhel's profits at Rs 5.5 bn in FY03, as compared to the Rs 5.1 bn it actually reported.

Notwithstanding the lackluster FY03 performance, we maintain that Bhel will continue to dominate the Indian engineering scene. However, management function is government dependent, which is a concern. At Rs 235 the stock trades at 9.2x our FY04 earnings, price to book value of almost 1x. Historically, the stock has traded at a P/E band of 7x to 12x. Already the stock has run up 20% in the last three months. Though we anticipate weakness in the stock due to the earnings growth disappointment in FY03, with a long term view, we believe Bhel will be one of the key companies that will benefit immensely as power reforms gain momentum.

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