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BHEL: Sign of things to come? - Views on News from Equitymaster

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BHEL: Sign of things to come?

Jul 22, 2009

Performance summary
  • Sales grow by a strong 29% YoY in 1QFY10.This is aided by strong performance of the power segment, where sales have grown by 30% YoY.
  • Operating margins rise by 0.6% YoY during the quarter led by decline in other costs (as percentage of sales). Material costs are up due to the fact that the company used up the inventory of raw materials acquired when the prices were reeling at high levels.
  • Net profits grow by 22% YoY during the quarter.
  • Order backlog stands at Rs 1,240 bn at the end of June 2009, higher by around 31% YoY.

Financial performance snapshot
(Rs m) 1QFY09 1QFY10 Change
Sales 43,292 55,957 29.3%
Expenditure 39,555 50,795 28.4%
Operating profit (EBDITA) 3,737 5,162 38.1%
Operating profit margin (%) 8.6% 9.2%  
Other income 2,917 3,029 3.8%
Interest 26 43 67.2%
Depreciation 726 961 32.4%
Profit before tax 5,903 7,187 21.7%
Tax 2,059 2,481 20.5%
Profit after tax/(loss) 3,844 4,706 22.4%
Net profit margin (%) 8.9% 8.4%  
No. of shares 489.5 489.5  
Diluted earnings per share (Rs)*   65.9  
P/E ratio (x)*   32.8  
* On a trailing 12-months basis

What has driven performance in 1QFY10?
  • The 29% YoY growth in BHEL’s topline during 1QFY10 was largely a result of a strong performance from its ‘power’ segment, which grew sales by 30% YoY. This segment contributed to 77.4% of the company’s total sales during the quarter (73.2% in 1QFY09). The company continues to bag orders for this segment, as is being seen by a 31% YoY growth in its order backlog (which is largely constituted by power segment orders). The second business segment of ‘industry’ saw a comparatively dull performance in 1QFY10, growing its sales by only about 4% YoY. At the end of June 2009, the company’s order backlog stood at Rs 1,240 bn, almost 5 times last fiscal’s annual sales.

    Segment-wise performance
    (Rs m) 1QFY09 1QFY10 Change
    Revenue 35,087 45,688 30.2%
    % share 73.2% 77.4%  
    PBIT margin 18.7% 18.1%  
    Revenue 12,851 13,325 3.7%
    % share 26.8% 22.6%  
    PBIT margin 14.1% 12.2%  
    Gross Total*      
    Revenue 47,938 59,013 23.1%
    PBIT margin 17.5% 16.8%  
    * 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 the end 2009. The management has indicated of a capex of Rs 42 bn during the eleventh five-year plan (FY08 to FY12).

  • BHEL’s operating margins expanded by 0.6% YoY during 1QFY10. This was led by a decline in other costs (as percentage of sales). Material costs, surprisingly were up during the quarter despite the fact that metal prices in general had fallen sharply in the period. This was on account of the fact that the company used up its inventory of raw materials that it had acquired at high prices during the last year. The decline in other costs was mainly because of a net withdrawal of provisions Rs 410 m during the quarter compared to a net Rs 1.4 bn of provisions created in the comparable period last year.

  • BHEL managed to grow its bottomline at 22% which was lower than its topline growth rate due to higher depreciation costs as a percentage of sales, as also a slower rate of growth of its other income.

What to expect?
At the current price of Rs 2,167, the stock is trading at a multiple of around 21 times our estimated FY12 earnings. BHEL’s 1QFY10 performance is robust given the weak environment that Indian capital goods companies are facing currently. The company continues to expand its vendor base in line with its capacity expansion plans as outlined in the above report. It is focusing on doing this all over the country so as to decrease the transportation costs associated with shifting heavy machinery.

In terms of acquisitions, the company has indicated that it would be willing to spend Rs 100 bn on growth by way of both organic and inorganic expansion. The company’s main rationale for an acquisition is to acquire new technology, and has already been doing the same for its power sector by way of numerous collaborations with international players. It is currently also in talks with various players like Alstom, Areva, GE, Toshiba for various components of nuclear power equipment. Overall, the company continues to enjoy one of the highest levels of revenue visibility in the capital goods sector on account of its forte in the power generation equipment business. That said, the stock’s valuations continue to remain on the higher side.

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