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BHEL: Margin expansion steals the show - Views on News from Equitymaster
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BHEL: Margin expansion steals the show
Jul 23, 2010

BHEL declared its 1QFY11 results. The company has reported 16% YoY growth in sales while its net profits have grown by 42% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by 16% YoY in 1QFY11.This is aided by the performance of the power segment, where sales have grown by 18% YoY.
  • Operating margins rise significantly by 3.8% YoY during the quarter led by decline in raw material costs (as percentage of sales). Material costs are down on the back of the company using up the inventory of raw materials that was acquired when prices were still recovering from their lows.
  • Net profits grow by 42% YoY during the quarter due to the expansion in margins at the operating level.
  • Order backlog stands at Rs 1,480 bn at the end of June 2010, higher by around 19% YoY.


Financial performance snapshot
(Rs m) 1QFY10 1QFY11 Change
Sales 55,957 64,797 15.8%
Expenditure 50,795 56,360 11.0%
Operating profit (EBDITA) 5,162 8,437 63.4%
Operating profit margin (%) 9.2% 13.0%  
Other income 3,029 2,848 -6.0%
Interest 43 38 -10.5%
Depreciation 961 1,269 32.0%
Profit before tax 7,187 9,978 38.8%
Tax 2,481 3,301 33.1%
Profit after tax/(loss) 4,706 6,677 41.9%
Net profit margin (%) 8.4% 10.3%  
No. of shares 489.5 489.5  
Diluted earnings per share (Rs)*   92.1  
P/E ratio (x)*   26.7  
* On a trailing 12-months basis

What has driven performance in 1QFY11?
  • The 16% YoY growth in BHEL's topline during 1QFY11 was largely driven by its 'power' segment, which grew sales by 18% YoY. This segment contributed to 79% of the company's total sales during the quarter (77% in 1QFY10). The company continues to bag orders as is seen by a 19% YoY growth in its order backlog (which is largely constituted by power segment orders). The second business segment of 'industry' saw a more sober performance in 1QFY11, growing its sales by only about 11% YoY. At the end of June 2010, the company's order backlog stood at Rs 1,480 bn, almost 4.3 times last fiscal's annual sales.

    Segment-wise performance
    (Rs m) 1QFY10 1QFY11 Change
    Power      
    Revenue 45,688 53,999 18.2%
    % share 77% 79%  
    PBIT margin 18.1% 19.8%  
    Industry      
    Revenue 13,325 14,763 10.8%
    % share 23% 21%  
    PBIT margin 12.2% 11.5%  
    Gross Total*      
    Revenue 59,013 68,762 16.5%
    PBIT margin 16.8% 18.0%  
    * Excluding inter-segment adjustments

  • BHEL’s operating margins expanded by a robust 3.8% YoY during 1QFY11. This was led by a decline in raw material costs (as percentage of sales). Material costs were down during the quarter despite overall rise in metal prices from their crisis lows. This was on account of the company using up its inventory of raw materials which it had acquired at lower prices during the last year. Employee costs on the other hand saw a rise of about 0.7% (as a percentage of sales).

  • BHEL managed to grow its bottomline at a stellar rate of 42% which was higher than its topline growth rate due to the significant expansion in operating margins. This number would have been even higher were it not for a 6% YoY fall in other income.

What to expect?
At the current price of Rs 2,460, the stock is trading at a multiple of around 19.1 times our estimated FY13 earnings. The company has turned in quite a good performance considering that engineering companies in general usually have a subdued first quarter. However, we remain cautious on the stock on account of its Research Pro subscribers can view latest updates here high valuations currently.

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