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BHEL: Stellar margins boost performance - Views on News from Equitymaster

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BHEL: Stellar margins boost performance
May 26, 2010

BHEL declared its FY10 results. The company has reported 25% YoY growth in sales while its net profits have grown by 37% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by about 29% YoY in 4QFY10. Growth aided by a 30% YoY increase in the company’s ‘Power’ segment.
  • Operating margins expand by 2.2% YoY during the quarter owing to significant fall in raw material costs (as percentage of sales).
  • Net profits increase by a robust 42% YoY during the quarter. This is mainly due to the expansion in operating margins as also a lower effective tax rate.
  • Declares a final dividend of Rs 12.30 per share (dividend yield of 0.5%).


Financial performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Sales 105,401 135,591 28.6% 262,342 328,803 25.3%
Expenditure 88,438 110,718 25.2% 224,328 273,145 21.8%
Operating profit (EBDITA) 16,963 24,873 46.6% 38,014 55,658 46.4%
Operating profit margin (%) 16.1% 18.3%   14.5% 16.9%  
Other income 5,072 5,935 17.0% 14,124 15,164 7.4%
Interest 81 178 120.0% 307 335 9.1%
Depreciation 1,008 1,647 63.3% 3,343 4,580 37.0%
Profit before tax 20,945 28,983 38.4% 48,489 65,907 35.9%
Tax 7,471 9,887 32.3% 17,106 22,800 33.3%
Profit after tax/(loss) 13,475 19,096 41.7% 31,382 43,106 37.4%
Net profit margin (%) 12.8% 14.1%   12.0% 13.1%  
No. of shares       489.5 489.5  
Diluted earnings per share (Rs)*         88.1  
P/E ratio (x)*         25.5  
* On a trailing 12-months basis

What has driven performance in FY10?
  • The 29% YoY growth in BHEL’s topline during 4QFY10 was largely a result of a robust performance from its ‘power’ segment, which grew sales by 30% YoY. The ‘industry’ segment grew at a slower pace of 16% YoY during the quarter. Overall order inflows during the year remained almost flat at about Rs 590 bn. However, the company's order book at the end of the year stood at 1,438 bn (a growth of 23% YoY). This is 4.2 times its FY10 sales. It should be noted that the company commissioned just about 6,500 MW of power plant equipment during FY10. This is much lower than the 10,000 MW of capacity that BHEL had at its disposal.
    Segment-wise performance
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Power            
    Revenue 86,079 111,549 29.6% 213,444 268,607 25.8%
    % share 76% 78%   75% 77%  
    PBIT margin 20.1% 27.4%   18.1% 23.5%  
    Industry            
    Revenue       >27,161       31,491 15.9%        72,495 78,790 8.7%
    % share 24% 22%   25% 23%  
    PBIT margin 21.5% 25.6%   16.8% 20.8%  
    Gross Total*            
    Revenue     113,240    143,040 26.3%     285,939    347,397 21.5%
    PBIT margin 20.4% 27.0%   17.8% 22.9%  
    * Excluding inter-segment adjustments

  • BHEL has finally completed its long awaited capacity expansion to 15,000 MW of power equipment per annum. It aims to further take this up to 20,000 MW by FY12. Other than that, it also established manufacturing facilities for super critical equipment. A manufacturing facility for high rating transformers was also set up during the year. Further, in a bid to enhance its erection capabilities at various project sites, the company procured 31 new high capacity cranes. The management has indicated of a capex of Rs 42 bn during the entire eleventh five-year plan (FY08 to FY12), with about Rs 19 bn that will be spent towards the same in FY11.

  • BHEL’s operating margins expanded by 2.3% YoY during 4QFY10. This was largely due to a fall in the cost of raw materials coupled with a fall in staff costs (as a percentage of sales). We expect this favourable trend (lower input costs) to continue for some more quarters. The fall is mostly due to the fact that the inventory of raw materials used is with a lag of about 6 months. The prices at that time were still low and thus the lower costs. The rise in prices of key commodities to relatively higher levels will take some time before its shows up in the company’s numbers.

  • The expansion in operating margins along with a lower effective tax rate led BHEL to post a growth in net profits of about 42% YoY during to quarter, much higher than its topline growth of 29% YoY.

What to expect?
At the current price of Rs 2,247, the stock is trading at a multiple of 20.3 times our estimated FY12 earnings. As per the management, the company is well on its way to becoming a Rs 450 bn turnover company by FY12, which in our view is achievable. However, considering the stock’s expensive valuations, we reiterate our negative view on the stock.

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