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BHEL: Industry woes impact performance

Jun 3, 2014 | Updated on Oct 30, 2019

Bharat Heavy Electricals (BHEL) has announced fourth quarter and annual results of financial year 2013-2014 (4QFY14). The company has reported 21.7% YoY and 43% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales declined by 21.7% YoY in 4QFY14.
  • Operating profits declined by 41.2% YoY during the quarter. Operating margins dropped by 6% YoY to 18.2% in 4QFY14.
  • Interest for the quarter increased by 18.3% YoY. In line with operating profits, net profits declined by 43% YoY during the quarter.
  • The order book at the end of FY14 stands at Rs 1,015 bn (down 12% YoY).
  • The company declared a final dividend of Rs 1.52 per share during the quarter.

Financial performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Sales 188,502 147,549 -21.7% 476,177 383,888 -19.4%
Operating income  3,542 2,766 -21.9% 8,070 7,200 -10.8%
Expenditure 145,527 122,981 -15.5% 390,348 345,890 -11.4%
Operating profit (EBDITA) 46,517 27,334 -41.2% 93,898 45,198 -51.9%
Operating profit margin (%) 24.2% 18.2%   19.4% 11.6%  
Other income 2,924 2,889 -1.2% 11,217 16,160 44.1%
Interest 405 479 18.3% 1,253   1,326 5.9%
Depreciation 2,889 2,718 -5.9% 9,534   9,829 3.1%
Profit before tax 46,147 27,025 -41.4% 94,329 50,203 -46.8%
Prior period items -4 -60 NA -4 -60 NA
Tax 13,766 8,519 -38.1% 28,177 15,535 -44.9%
Profit after tax/(loss) 32,376 18,446 -43.0% 66,147 34,608 -47.7%
Net profit margin (%) 16.9% 12.3%   13.7% 8.8%  
No. of shares         2,448  
Basic & Diluted earnings per share (Rs)         14.1  
P/E ratio (x)*         17  
* On a trailing 12 month basis

What has driven performance in 4QFY14 and FY14?
  • BHEL's sales have declined by 21.7% YoY for the quarter. This is primarily on account of slow moving orders. Revenues from the power segment declined 21.4% YoY while that from the industry segment declined 25.8% YoY.

  • BHEL's total material cost as a percentage of sales increased this quarter to 57.7% from 55.3% in 4QFY13. Also, staff cost as a proportion of sales increased from 7.5% in 4QFY13 to 8.8% in 4QFY14. Other costs too increased as a percentage of sales. This led to a sharp decline of 41.2% YoY in operating profits.

  • Segment wise EBIT margin also declined. EBIT margin for the power segment declined from 26% in 4QFY13 to 19%; while that from the industry segment dropped from 22% in 4QFY13 to 19% this quarter. Low margin orders coupled with increasing cost have led to margin erosion in both the segments.

  • The net profits of the company declined 43% YoY in 4QFY14 on account of disappointing operating performance and increase in interest cost.

  • The order inflow for the quarter stands at Rs 164 bn. The inflows were driven by a couple of large projects from NTPC like North Karanpura (3x660 MW) and Darlipalli.

  • For FY14, sales dropped by 19.4% YoY. EBITDA declined by 51.9% YoY. Net profits declined by 47.7% YoY led by poor operating performance.

  • Order inflow for FY14 stands at Rs 280 bn (down 12% YoY).

  • BHEL's Debtors days stands at about 250 or more days. Debtors outstanding for more than a year currently stands at Rs 100 bn which is 35% of its total debtors.

    Segment-wise performance
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Revenue 155,259 122,108 -21.4% 395,525 324,854 -17.9%
    % share 78% 79%   79% 81%  
    PBIT margin 26% 19%   22% 17%  
    Revenue 43,409 32,208 -25.8% 106,040 78,525 -25.9%
    % share 22% 21%   21% 19%  
    PBIT margin 22% 19%   21% 13%  
    Gross Total*
    Revenue 198,668 154,316 -22.3% 501,565 403,379 -19.6%
    * Excluding inter-segment adjustments & Excise Duty
What to expect?
BHEL' s performance has been very disappointing in FY14 with significant erosion in sales and margins. BHEL's 20% of the order book is slow moving and projects of clients like Visa Power and Abhijeet Group have still not seen any significant momentum. Also, despite employing cost cutting measures the company could not salvage a significant drop in its margins. Non-payment of dues is another issue which the company is facing. However, the company is exploring various ways to fast track the payments of its dues from clients like JP Power, Bajaj Hindustan and Monnet Power.

At the current price of Rs 242, the stock is trading at a multiple of 17x its trailing twelve month earnings. Despite weak numbers, BHEL's stock price has had a sharp run up recently based on hopes that the new government will expedite the power sector reforms and deal with the bottlenecks more efficiently. Also, as and when the economy picks up; the company is well positioned to take on projects in other avenues as well besides power such as railways and airports. In the power segment too; around 16,000 MW of projects are in the pipeline. Besides that the company is eying two ultra mega power projects (UMPPs). Hence, going forward BHEL shall be able to see an up-tick in its order book and thereby improvement in sales and margins. Also, order inflows of FY15 and FY16 are likely to impact the sales and profits in the later years and therefore future prospects of the company look bright.

Since FY14 is over, we shall revisit our estimates and view on BHEL and shall soon update investors with a revised view and target price based on FY17 earnings. Till then we recommend the investors to Hold on to the stock and avoid taking any fresh position in the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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