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BHEL: Swelling order books

Jul 29, 2004

Introduction to results
Engineering major, BHEL, has declared good results for 1QFY05. The company has posted a 13% YoY increase in topline and the bottomline, which was negative in 1QFY04, turned positive in this quarter. The operating margins of the company have improved significantly (up 280 basis points.

(Rs m) 1QFY04 1QFY05 Change
Net sales 11,270 12,755 13.2%
Other income 595 786 32.1%
Expenditure 11,234 12,358 10.0%
Operating profit (EBDITA) 36 397 1002.8%
Operating profit margin (%) 0.3% 3.1%  
Interest 112 125 11.6%
Depreciation 492 509 3.5%
Profit before tax 27 549 1933.3%
Extraordinary items 198 179 -9.6%
Tax (60) 135  
Profit after tax/(loss) (111) 235  
Net profit margin (%) -1.0% 1.8%  
No. of shares (m) 244.8 244.8  
Diluted earnings per share (Rs)* (1.8) 3.8  
P/E ratio (x)   139.8  
(* annualised)      

Business profile
Bharat Heavy Electricals Limited (BHEL) is India's largest engineering company with market leadership in the power sector. In power, the company is into setting up thermal, nuclear, gas, diesel and hydro power plants. The company till date accounts for 64% of the installed power capacity (69,129 MW). Power business forms around 65% on the company's total revenues. The PBIT margins from this segment stand at around 20%. The company has strong ties with NTPC, and historically, BHEL has bagged around 85% of the contracts floated by NTPC. The current outstanding order book position of the company stands at Rs 280 bn. In power business, BHEL is mainly into manufacturing and installing power generation equipments and is the market leader in the same. Its industrial business includes power transmission, transportation, telecommunication and renewable energy.

What has driven performance in 1QFY05?
Sales:  The topline of the company grew by 13% during the quarter on the back of a 10% growth in power revenues and a significant 23% growth in the revenues from its industry segment. The power division of the company had an order inflow of Rs 127 bn during FY04 (79% higher than last year). However, this being the first quarter, the growth of the division is lower than the expected 15% average annual growth owing to the fact that revenues tend to be reflected in the books in the latter quarters of the year. Thus, we believe the division to grow at a faster rate going forward. On the other hand, it must be noted that the industry segment of the company had grown by 22% in FY04 and considering the upturn in the investment cycle; we believe a healthy double-digit growth is sustainable over the medium-term.

The order inflow of the company in 1QFY05 stood at Rs 57 bn, which is 240% higher as compared to the same quarter last year. The order backlog of the company stood at Rs 280 bn, which is highest ever 3.5 times FY04 sales.

Segmental break-up 1QFY04 1QFY05 Change
Power 8,280 9,114 10.1%
PBIT margins (%) 15.3% 12.8%  
Industry 3,480 4,268 22.6%
PBIT margins (%) -6.8% 0.8%  

Operating margins:  The operating margins of the company improved can be attributed to the improved performance of the company's industry segment. This registered positive margins for the quarter as compared to negative margins during the same quarter last year. However, the power segment of the company witnessed a decline in the PBIT margins, but investors should remember that as power projects reach completion, revenues start accruing at the faster rate. So, for the power division, margins normally tend to improve towards the year-end. Also the company has continued its work force rationalization exercise and as a result, staff cost as a percentage of sales has declined to 29.5% as compared to 32.4% during the same quarter last year.

Net profit margins:  Apart from the improved performance at the operating level, which is reflected in the bottomline, higher other income (up 32%) and lower extra ordinary expenditure also helped the company post the positive performance in the quarter.

What to expect?
At the current price of Rs 536, the stock trades at a P/E multiple of 139.8x annualised 1QFY05 earnings. However, an investor must remember that the first quarter is not a true reflector of an engineering company's annual performance. Since, both private and state owned power companies in India are expected to add huge generation capacities, it will further provide strength to BHEL's orderbook size going forward. BHEL's track record of installing 65% of the India's thermal power generation capacity also speaks for its expertise in installing power plants. While the strengthening orderbook size of the company ensures topline growth, the margins of its power and industry segment are likely to sustain in medium term. To this extent, the future prospects of the company remain bright.

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