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BHEL: Back on track - Views on News from Equitymaster
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BHEL: Back on track
Jul 26, 2012

Bharat Heavy Electricals Limited (BHEL) has announced first quarter results of financial year 2012-2013. The company has reported 16.9% YoY growth in sales while its net profits have grown by 12.9% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by about 16.9% YoY in 1QFY13.
  • Operating profits increase by 18.1% YoY. However, operating margins were relatively flat at 14.2% during the quarter.
  • Net profits increase by 12.9% YoY during the quarter mainly due to strong performance at the operating level, rise in other income and fall in interest expenses. However, depreciation expenses increased by 33.6% YoY.
  • The order book at the end of the quarter stands at Rs 1,329 bn.

Financial performance: A snapshot
(Rs m) 1QFY12 1QFY13 Change
Sales 71,234 83,262 16.9%
Operating income 936 1,128 20.5%
Expenditure 61,986 72,368 16.7%
Operating profit (EBDITA) 10,184 12,022 18.1%
Operating profit margin (%) 14.1% 14.2%  
Other income 3,435 3,663 6.6%
Interest 88 55 -37.3%
Depreciation 1,709 2,284 33.6%
Profit before tax 11,822 13,346 12.9%
Tax 3,667 4,137 12.8%
Profit after tax/(loss) 8,155 9,209 12.9%
Net profit margin (%) 11.3% 10.9%  
No. of shares   2,447  
Basic & Diluted earnings per share (Rs)   3.8  
P/E ratio (x)* 7.5  
* On a trailing 12-months basis

What has driven performance in 1QFY13?
  • The 16.9% YoY growth in BHEL's topline during 1QFY13 was largely a result of a robust performance from both power and industry segments. Revenues from the industry segment increased 19.3% YoY while that from the power segment increased 17.2% YoY.

  • The current order book stands at Rs 1,329 bn. The company registered an order inflow of Rs 55.9 bn in 1QFY13. Out of the total inflow, roughly Rs 37.9 bn of the orders were from the power sector and Rs 8.3 bn from the industry sector with the balance coming from exports. In mega watt terms, the company booked 2,970 MW of orders during the quarter.

    Segment-wise performance
    (Rs m) 1QFY12 1QFY13 Change
    Power
    Revenue 57,803 67,720 17.2%
    % share 78% 77%  
    PBIT margin 16.5% 17.8%  
    Industry
    Revenue 16,529 19,717 19.3%
    % share 22% 23%  
    PBIT margin 22.6% 21.0%  
    Gross Total*
    Revenue 74,332 87,436 17.6%
    PBIT margin 17.8% 18.5%  
    * Excluding inter-segment adjustments & Excise Duty

  • BHEL's operating margins were more or less flat during 1QFY13. While the staff cost declined from 18.3% of sales in 1QFY12 to 16.8% in 1QFY13, other costs increased from 10.5% of sales to 11.8% in 1QFY13.

  • Net profits increased by 12.9% YoY. Strong performance at the operating level and fall in interest expenses supported profitability growth.

What to expect?
Going forward, management expects 10,000 to 15,000 MW of order tendering in the market as a whole (Majority of these orders are likely to be from the government sector). As a result, it has maintained its full year order inflow guidance of Rs 600 bn. As far as revenue guidance is concerned, management expects to end the year with Rs 470 bn. It may be noted that the MoU level target is in the region of Rs 500 bn. However, maintaining the margins could turn out to be a big challenge for the company.

As far as the overall market situation is concerned, neither the pricing trends nor the order finalizations have shown any significant improvements. However, the recent levy of import duty is expected to benefit the local manufacturers in the long run. Lastly, though client advances have not fallen dramatically, managing working capital will prove to be a challenge for the company due to significant delays witnessed in project finalizations. However, considering the long term prospects, attractive valuations and cor-relation between power sector and India growth story, we feel that the stock is a strong buy at these levels. Thus, we maintain our Buy rating on the stock.

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