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Bharat Bijlee: Hurt by slowdown issues - Views on News from Equitymaster
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Bharat Bijlee: Hurt by slowdown issues
May 12, 2008

Performance summary
  • Topline grows 20% YoY during FY08. Growth slackens during the fourth quarter, with sales up by a mere 11% YoY. Actual sales figure 15% lower than our estimates.
  • Operating margins expand by 1.6% during FY08, though lower than our estimated increase of 2.5%. Lower raw material costs and other expenditure (both as percentage of sales) aid this expansion.
  • Net profits grow by 32% YoY, largely aided by operating margin expansion. Actual profit figure 20% lower than our estimates on the back of the company’s underperformance on the operating profitability front (vis-ŕ-vis our estimates).
  • Board recommends dividend of Rs 30 per share (dividend yield of 1.4%)

Financial performance snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Sales 1,790 1,993 11.4% 4,699 5,624 19.7%
Expenditure 1,345 1,505 11.9% 3,815 4,475 17.3%
Operating profit (EBDITA) 445 489 9.9% 883 1,149 30.0%
Operating profit margin (%) 24.8% 24.5%   18.8% 20.4%  
Other income 23 13 -44.6% 45 34 -26.0%
Interest 14 6 -58.8% 53 26 -50.7%
Depreciation 12 13 7.4% 29 39 34.1%
Profit before tax 442 483 9.2% 847 1,117 31.9%
Extraordinary income/(expense) (4) -   (14) -  
Tax 148 171 15.5% 281 392 39.4%
Profit after tax/(loss) 291 312 7.3% 551 725 31.6%
Net profit margin (%) 16.2% 15.7%   11.7% 12.9%  
No. of shares       5.7 5.7  
Diluted earnings per share (Rs)       97.5 128.3  
P/E ratio (x)         17.5  

What to expect?
At the current price of Rs 2,240, the stock is trading at a multiple of 17.5 times its FY08 earnings. We shall await more details from the company before completing this analysis. However, considering that the FY08 performance has been below our estimates, we have revised downwards our forward numbers for the company. While the stock is trading at attractive levels if one were to take a decision on the current price, the fact is that we went wrong in our initial estimates for the company, which we have duly revised downwards by around 20%.

Against a 33% and 46% compounded annual rates of growth that we had projected for the company’s sales and net profits during the period FY07 to FY10, we have revised them down to 24% and 32% respectively. And subsequently, our target for the stock now stands at Rs 3,780 (including cash of Rs 428 per share), against the target of 4,960 that we had ascertained at the time of recommending the stock. These are our assumptions based on the FY08 performance and does not include management’s estimates and views. As a matter of fact, the management of the company will be unavailable for comments for at least the next three weeks.

The fact is that, like its peers in the engineering and capital goods sector, the fourth quarter of FY08 has been the undoing of a strong performance during the nine-month period for Bharat Bijlee. Like the larger players from the sector (BHEL and Siemens) who have faced execution risks and have subsequently provided for cost overruns that has impacted their 4QFY08 performance, Bharat Bijlee seems to have been hit by slowdown issues as well.

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