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BHEL: Dismal Quarter - Views on News from Equitymaster
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BHEL: Dismal Quarter
Jun 10, 2015

Bharat Heavy Electricals has announced fourth quarter results for the financial year 2014-2015. The company has reported 15.6% YoY decline in sales. Profit after tax dropped by 52% YoY. Here is our analysis of the results.

Performance summary
  • Net sales for the company declined by 15.6% YoY in 4QFY15 on the back of lower opening order book and weak execution.
  • Operating profits declined by 39% YoY during the quarter.
  • EBITDA margin for the company decreased marginally to 13.26% in 4QFY15 vs. 18.18% in 4QFY14.
  • Net profit for the quarter dropped 52% YoY.
  • The company ended the quarter with an order book of Rs 1,011 bn, almost flat YoY.

(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 150,315 126,860 -15.60% 391,088 301,830 -22.82%
Expenditure 122,981 110,042 -10.52% 345,889 276,980 -19.92%
Operating profit (EBDITA) 27,334 16,818 -38.47% 45,199 24,850 -45.02%
EBDITA margin (%) 18.18% 13.26%   11.56% 8.23%  
Other income 2888.7 160.2 -94.45% 16,161 8,340 -48.39%
Interest (net) 479.3 265.3 -44.65% 1,327 916 -30.97%
Depreciation 2718.3 2821 3.78% 9,829 10,772 9.59%
Profit before tax 27,025 13,892 -48.60% 50,204 21,502 -57%
Tax 8518.9 4906.9 -42.40% 15535 7,207 -54%
Exceptional Items 60 101.1 68.50% 60 101 69%
Profit after tax/(loss) 18,446 8,884 -51.84% 34,609 14,194 -58.99%
Net profit margin (%) 12.27% 7.00%   8.85% 4.70%  
No. of shares (m)       2447.6 2447.6  
Diluted earnings per share (Rs)*         5.80  
Price to earnings ratio (x)*         42.95  

What has driven performance in FY15?
  • Revenues of Power segment saw a decline of 16% YoY. Considering that they contribute a large part of total sales, this is the segment that dragged the overall performance down during the quarter. The industry segment's sales fell by 14% YoY. The revenue was also dented due to large proportions of slow moving projects in the overall order backlog and customer centric delays in the private sector.

  • The staff expenses were down 31% YoY as the company reduced the headcount by 2600. Meanwhile other expenses were up by 10% YoY.

  • Order inflow remained tepid during the quarter at Rs 102 bn and in FY15 at Rs 308 bn

  • Due to lower operating performance, PAT stood at Rs 8.88 bn, down 52% YoY.
What to expect?
BHEL's performance has been very disappointing in FY15 with significant erosion in sales and margins. Also, despite employing cost cutting measures the company could not salvage a significant drop in its margins. However, materials consumption level remained at 58% despite a fall in revenues.

Further, almost 15 GW of projects totaling Rs 230 bn have been on a standstill mode since September 2014 because the coal mine related to the project has been de-allocated. The company has targeted 100MW of solar PV ordering and has till now achieved 51MW of orders valued at Rs 3.4 bn. Management hopes to receive a subsidy of 40% (Rs10 bn) on an investment of Rs 27 bn. Key things to watch out for are any potential signs of improvement in its execution & working capital cycle and execution of slow moving orders.

At a current price of Rs 250.4, the stock is trading at a multiple of 10.4x our FY17E earnings. Considering these valuations, we maintain our BUY view on the stock.

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