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BHEL: Stagnant order book

May 23, 2012

Bharath Heavy Electricals Limited. (BHEL) has announced fourth quarter and full year results of financial year 2011-2012. The company has reported 7.5% YoY growth in sales while its net profits have grown by 20.8% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by about 7.5% YoY in 4QFY12. Growth was aided by 38.1% YoY growth in the industry segment. Revenues from the power segment increased 2.2% YoY.
  • Operating margins expand by 2.8% YoY during the quarter.
  • Net profits increase by 20.8% YoY during the quarter mainly due to rise in other income and fall in interest expenses.
  • The order book at the end of the quarter stands at Rs 1.35 tn, For FY13, the company has signed a Memorandum of Undertaking (MoU) target of Rs 500 bn with the government.
  • The company has announced a total dividend of Rs 6.4 per share for the fiscal under consideration.

Financial performance snapshot
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 179,149 192,595 7.5% 415,661 472,279 13.6%
Operating income 3,067 3,294 7.4% 6,805 7,510 10.4%
Expenditure 141,325 146,517 3.7% 336,629 380,909 13.2%
Operating profit (EBDITA) 40,892 49,372 20.7% 85,837 98,880 15.2%
Operating profit margin (%) 22.8% 25.6%   20.7% 20.9%  
Other income 3,676 3,989 8.5% 10,206 12,656 24.0%
Interest 305 183 -39.9% 547 513 -6.3%
Depreciation 1,384 2,541 83.6% 5,441 8,000 47.0%
Profit before tax 42,879 50,637 18.1% 90,054 103,023 14.4%
Tax 14,898 16,838 13.0% 29,942 32,623 9.0%
Profit after tax/(loss) 27,980 33,798 20.8% 60,112 70,400 17.1%
Net profit margin (%) 15.6% 17.5%   14.5% 14.9%  
No. of shares         2,447  
Basic & Diluted earnings per share (Rs)         28.8  
P/E ratio (x)*         7.3  
* On a trailing 12 month basis

What has driven performance in 4QFY12?
  • The 7.5% YoY growth in BHEL's topline during 4QFY12 was largely a result of a robust performance from its ‘Industry' segment. Revenues from the industry segment increased 38.1% YoY. However, sales from the power segment increased at a modest pace of 2.2% YoY.

  • The current order book stands at Rs 1.35 tn. The company registered an order inflow of Rs 220.9 bn in FY12. This is significantly lower than the order inflow of Rs 605.0 bn in the previous fiscal. Difficulties in getting coal linkages and the existing environmental issues have impacted the order inflow for the year. Going forward, management expects order inflow of 14000-15000 MW in FY13. However, it may be noted that most of these orders are basically carried forward from the previous year.

    Segment-wise performance
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Revenue 152,351 155,738 2.2% 331,655 378,629 14.2%
    % share 82% 77%   76% 76%  
    PBIT margin 24.5% 27.4%   23.9% 21.6%  
    Revenue 33,883 46,789 38.1% 102,144 116,589 14.1%
    % share 18% 23%   24% 24%  
    PBIT margin 40.7% 30.4%   22.3% 28.7%  
    Gross Total*
    Revenue 186,234 202,527 8.7% 433,799 495,217 14.2%
    PBIT margin 27.4% 28.0%   23.7% 23.3%  
    * Excluding inter - segment adjustments & Excise Duty

  • BHEL's operating margins expanded by 2.8% YoY during 4QFY12. This was largely due to fall in staff cost as a percentage of sales. The staff cost of the company declined from 8.1% in 4QFY11 to 7.7% in 4QFY12.

  • Net profits increased by 20.8% YoY. Strong performance at the operating level and fall in interest expenses supported profitability growth.

What to expect?
FY12 was a challenging year for BHEL. The company missed its order inflow guidance for the year by about 64%. Existing environmental problems and issues in getting coal linkages impacted the order pipeline of the company. For the full year, margins from the power segment were down due to weaker execution and inflationary pressures. However, the overall margins were relatively flat due to strong performance from the Industrial segment. Nonetheless, we believe that the margins from the industrial segment are difficult to sustain in the future as those were driven by project specific execution. Going forward, rising competition and pricing pressures will keep margins under check. Even the working capital situation is expected to deteriorate due to fall in client advances.

We believe that the next few quarters will remain challenging for BHEL. Considering the recent performance, the future order inflow guidance and rising competitive pressures the stock has been significantly de-rated by the market. Further, as majority of the backlog caters to the power segment, execution worries also remain.

Based on these factors we have revised our valuation band for the company. Further, due to near term concerns on margins and topline growth we have also been conservative in our estimates. Nonetheless, considering the long term prospects and the cor-relation between power sector and India growth story, we feel that the stock is still a compelling buy at these levels. Thus, we would advise our investors to average the stock at current levels. Our revised target stands at Rs 500 from a FY15 perspective and we maintain our Buy rating on the stock.

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Jun 22, 2021 09:31 AM