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BHEL: Good fourth quarter, stable year - Views on News from Equitymaster
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BHEL: Good fourth quarter, stable year
May 27, 2009

Performance summary
  • Net sales grow 36% YoY in FY09, led by a strong growth in both its segments. BHEL’s ‘power’ segment grew by 34% YoY, while its ‘industry’ segment recorded a growth of 21% YoY.
  • During FY09, the company’s operating margins contracted by 2.9% YoY owing to higher raw material costs (as a percentage of sales).
  • Net profits grow by 10% YoY during FY09. This is mainly on account of BHEL’s poor performance at the operating level. Actual profit figure for the fiscal 7% higher than our estimates.
  • During 4QFY09, the company’s topline and bottom line grew by 46% YoY and 21% YoY respectively.
  • Recommends a final dividend of Rs 8 per share (that, along with an interim dividend of Rs 9 per share paid during the year, leads to a dividend yield of 0.8%)


Financial performance: A snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Sales 72,020 105,401 46.3% 193,655 262,342 35.5%
Expenditure 58,387 88,438 51.5% 159,987 224,328 40.2%
Operating profit (EBDITA) 13,634 16,963 24.4% 33,668 38,014 12.9%
Operating profit margin (%) 18.9% 16.1%   17.4% 14.5%  
Other income 4,242 5,072 19.6% 13,962 14,124 1.2%
Interest 42 81 91.3% 354 307 -13.3%
Depreciation 827 1,008 21.9% 2,972 3,343 12.5%
Profit before tax 17,006 20,945 23.2% 44,304 48,489 9.4%
Tax 5,897 7,471 26.7% 15,711 17,106 8.9%
Profit after tax/(loss) 11,109 13,475 21.3% 28,593 31,382 9.8%
Net profit margin (%) 15.4% 12.8%   14.8% 12.0%  
No. of shares       489.5 489.5  
Diluted earnings per share (Rs)       58.4 64.1  
P/E ratio (x)         32.4  

What has driven performance in FY09?
  • BHEL’s topline grew by 36% YoY in FY09, led by a strong growth in both its segments. While the ‘power’ segment turned in a good performance by growing 34% YoY compared to a 15% YoY growth recorded during FY08, its ‘industry’ segment recorded a growth of 21% YoY. Power sector order inflows during FY09 were Rs 471 bn covering the utility and spares businesses. Some major orders received by this segment included orders for 800 MW and 660 MW supercritical boiler & turbines and 700 MW steam generators for Nuclear Power Corporation apart from the other orders for smaller rating sets.

    Segment-wise performance
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Power            
    Revenue 56,740 86,079 51.7% 159,188 213,444 34.1%
    % share 70.2% 76.0%   72.6% 74.6%  
    PBIT margin 31.3% 20.1%   24.7% 18.1%  
    Industry            
    Revenue 24,133 27,161 12.5% 60,107 72,495 20.6%
    % share 29.8% 24.0%   27.4% 25.4%  
    PBIT margin 26.1% 21.5%   18.1% 16.8%  
    Gross Total*            
    Revenue 80,873 113,240 40.0% 219,294 285,939 30.4%
    PBIT margin 29.7% 20.4%   22.9% 17.8%  
    * Excluding inter-segment adjustments

  • BHEL recorded a 2.9% YoY contraction in operating margins during FY09. This was largely due to increase in its raw material costs which saw major volatility during the year. These costs increased from 59.3% of sales in FY08 to 65.3% in FY09. As was reported by BHEL’s management during the announcement of provisional results for FY09 in April, apart from raw materials the company’s performance has also taken a hit during the year owing to wage provisions, which was a sum of Rs 17.3 bn for the year. The management has indicated that there will be no more wage provisions made during the current financial year. Segment wise, both the power segment and the industry segment saw contraction in EBIT margins during the fiscal.

  • The company’s bottomline grew by 10% YoY during FY09. This was mainly on account of its poor performance at the operating level. BHEL’s management has said that the bottomline growth would have been 25% YoY for the fiscal were it not for the wage provisions the company made.

What to expect?
At the current price of Rs 2,093, the stock is trading at a multiple of 26.3 times our estimated FY11 earnings for the company. BHEL currently has an order book of Rs 1,174 bn which will be executed over the next 3-4 years. Around 84% of these orders are from the power sector, 10% from industry and 6% for exports. The management expects sales and profits to grow by 20% and 25% respectively in FY10. It has also indicated that once the company achieves the 20,000 MW capacity level (from 10,000 MW currently), its cost will come down to an extent that will help the company enjoy economies of scale. Though the company’s business remains as sound as ever, we find ourselves cautious about the stock given its expensive valuations.

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