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BHEL: Bulging books

Jul 31, 2007

Performance summary
  • Sales grow 22% YoY in 1QFY08, led by 25% YoY growth in ‘power’ segment sales.

  • Operating margins contract by 240 basis points (2.4%), owing to higher raw material and staff costs (both as percentage of sales).

  • Net profit grows 22% YoY, helped by higher other income and lower interest expenses.

  • Order backlog stands at Rs 624 bn (3.6 times FY07 sales) at the end of June 2007

Financial performance: A snapshot
(Rs m) 1QFY07 1QFY08 Change
Sales 26,594 32,339 21.6%
Expenditure 23,412 29,232 24.9%
Operating profit (EBDITA) 3,182 3,107 -2.4%
Operating profit margin (%) 12.0% 9.6%  
Other income 1,201 2,063 71.8%
Interest 131 22 -83.2%
Depreciation 639 689 7.8%
Profit before tax 3,613 4,459 23.4%
Tax 1,246 1,570 26.0%
Profit after tax/(loss) 2,367 2,889 22.1%
Net profit margin (%) 8.9% 8.9%  
No. of shares   489.5  
Diluted earnings per share (Rs)*   50.4  
P/E ratio (x)*   33.4  
* On a trailing 12 months basis

What is the company’s business?
Bharat Heavy Electricals Limited (BHEL) is India's largest public sector engineering company with market leadership in supply of equipments to the energy-related/infrastructure sectors. The company has installed equipments for over 80,000 MW of power generation in the country, which includes capacities set up by utilities, captive and industrial users. Revenues from the power sector form around 73% of the company's total revenues, with the remaining being contributed by the industrial segment. The company has strong ties with the power generation major, NTPC, and historically, has bagged over 70% of the contracts floated by the former.

What has driven performance in 1QFY08?
‘Power’ed topline performance: The 22% YoY growth in BHEL’s 1QFY08 topline was a result of strong performance from the company’s power business, where sales grew 25% YoY. This segment contributed to 75% of the company’s totals sales during the quarter, and benefited from execution of the strong order backlog that the company has built up over the past few quarters. In light of the anticipated growth in demand, the company has plans of raising its equipment manufacturing capacity to 15,000 MW by the end of 2012. This should involve a capital expenditure of Rs 32 bn. In the interim, its capacity is expected to touch 10,000 MW by the end of 2007 (at an estimated cost of Rs 12 bn), from 6,000 MW currently.

Segment-wise performance
(Rs m) 1QFY07 1QFY08 Change
Revenue 21,828 27,362 25.4%
% share 73.9% 74.8%  
PBIT margin 18.7% 19.4%  
Revenue 7,706 9,198 19.4%
% share 26.1% 25.2%  
PBIT margin 4.7% 3.7%  
Gross Total*      
Revenue 29,534 36,560 23.8%
PBIT margin 15.1% 15.5%  
* Excluding inter-segment adjustments

As for the ‘industry’ segment, sales grew 19% YoY during 1QFY08. At the end of the quarter, the company had an order backlog of Rs 624 bn, or 3.6 times the full year sales in FY07. We maintain that while such a large backlog provides strong visibility into company’s growth over the next few years, a lot will be dependent on the execution of the company’s capacity expansion plans, as any delay in the same will jeopardise the sustenance of growth.

Higher raw material, staff costs dent margins: BHEL’s operating margins contracted by 240 basis points (2.4%) in 1QFY08, led by higher raw material and staff costs. While the former increased from 58.3% of sales in 1QFY07 to 58.8% in 1QFY08, the latter increased from 17.7% to 18.7% during this period.

Higher other income, lower interest costs help bottomline: Despite the contraction in operating margins and the consequent decline in operating profits, BHEL managed a 22% Yoy growth in net profits during 1QFY08. This was made possible by a 72% YoY growth in other income and 83% YoY decline in interest costs.

What to expect?
At the current price of Rs 1,683, the stock is trading at a multiple of 16.5 times our estimated FY10 earnings, which makes it fairly valued from a 2 to 3 years perspective. While the company continues to add on large orders to its portfolio, execution risks remain in terms of adding new manufacturing capacity in time and finding people with the right kind of skillsets to work on jobs. The potential is definitely there in terms of the power generation capacity that India requires in order to sustain high rates of economic growth. However, investors need to understand that there is always a ‘price’ for the potential!

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Mar 25, 2019 09:43 AM