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BHEL: Wage revision impacts margins
Jul 22, 2008

Performance summary
  • Sales grow 34% YoY in 1QFY09, aided by strong growth in both power and industry segments.

  • Operating margins contract by 1% YoY during the quarter owing to higher staff costs (as percentage of sales). Material costs though drop marginally as percentage of sales.

  • Net profits grow by 33% YoY, almost in line with the topline growth. Growth in profit aided by 41% YoY rise in other income.

  • Order backlog stands at Rs 950 bn at the end of June 2008, higher by 52% YoY and almost 5 times last fiscal’s annual sales.


Financial performance: A snapshot
(Rs m) 1QFY08 1QFY09 Change
Sales 32,339 43,292 33.9%
Expenditure 29,233 39,555 35.3%
Operating profit (EBDITA) 3,107 3,737 20.3%
Operating profit margin (%) 9.6% 8.6%  
Other income 2,063 2,917 41.4%
Interest 22 26 18.5%
Depreciation 689 726 5.3%
Profit before tax 4,459 5,903 32.4%
Tax 1,570 2,059 31.1%
Profit after tax/(loss) 2,889 3,844 33.1%
Net profit margin (%) 8.9% 8.9%  
No. of shares   489.5  
Diluted earnings per share (Rs)*   60.4  
P/E ratio (x)*   26.4  
* On a trailing 12-months basis

What has driven performance in 1QFY09?
  • The 34% YoY growth in BHEL’s topline during 1QFY09 was largely a result of a strong performance from its ‘power’ segment, which grew sales by 28% YoY. This segment contributed to 73.2% of the company’s total sales during the quarter (74.8% in 1QFY08). The company continues to big orders for this segment, as is being seen by a strong 52% YoY growth in its order backlog (which is largely constituted by power segment orders). The second business segment of ‘industry’ also performed strong during 1QFY09, growing its sales by 40% YoY. At the end of June 2008, the company’s order backlog stood at Rs 950 bn, almost 5 times last fiscal’s annual sales.

  • While the growth has come in strong during the quarter under review, there is no denying the fact that BHEL is facing acute shortage of workers and delays in order execution owing to capacity constraints, which the management had indicated at the end of last quarter’s results.

    Segment-wise performance
    (Rs m) 1QFY08 1QFY09 Change
    Power      
    Revenue 27,362 35,087 28.2%
    % share 74.8% 73.2%  
    PBIT margin 19.4% 18.7%  
    Industry      
    Revenue 9,198 12,851 39.7%
    % share 25.2% 26.8%  
    PBIT margin 3.7% 14.1%  
    Gross Total*      
    Revenue 36,560 47,938 31.1%
    PBIT margin 14.7% 17.5%  
    * Excluding inter-segment adjustments

  • The company currently has a manufacturing capacity of 10,000 MW per annum for power plant equipment. It is further enhancing its manufacturing capacity to 15,000 MW per annum to be completed by December 2009. The management has indicated of a capex of Rs 42 bn during the eleventh five-year plan (FY08 to FY12). Besides capacity augmentation of existing products in the areas of thermal, gas, hydro and nuclear, other major areas of investment shall include facilities for higher rating nuclear sets, 765kV transformers and other associated distribution and transmission equipment and capacity augmentation of transformers from 20,500 MVA to 45,000 MVA.

  • BHEL’s operating margins declined by 1% YoY during 1QFY09. This was largely due to increase in its staff costs on account of provision for wage revision on the recommendation of the “Second Pay Revision Committee for PSUs”. These costs increased from 18.7% of sales in 1QFY08 to 20.7% in 1QFY09. On the other hand, raw material costs declined from 58.8% of sales in 1QFY08 to 58.2% in 1QFY09. We expect the pressure on BHEL’s margins to remain during this fiscal on account of higher prices of key commodities like steel, aluminium and copper.

  • Despite contraction in operating margins, BHEL managed to grow its bottomline at a rate similar to its topline growth during 1QFY09. This was on account of a strong 41% YoY rise in other income increased during the quarter, while depreciation expenses increased by a marginal 5% YoY.

What to expect?
At the current price of Rs 1,593, the stock is trading at a multiple of 18.1 times our estimated FY10 earnings for the company. BHEL has turned out a strong topline performance during the quarter under review. However, concerns with respect to execution and volatile raw material prices continue to rule roost and are likely to impact the company’s profitability in the short to medium term, though long term profitability will be aided by economies of scale. The fact that BHEL continues to build upon its order book provides strong visibility into future growth. We maintain our positive view on the stock from a 2 to 3 years’ perspective.

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