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BHEL: Profits fall, order book rises - Views on News from Equitymaster
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BHEL: Profits fall, order book rises
Aug 8, 2015

BHEL has announced first quarter results for the financial year 2015-2016. The company has reported 15.5% YoY decline in sales. Profit after tax dropped by 82.5% YoY. Here is our analysis of the results.

Performance summary
  • Net sales for the company declined by 15.5% YoY in 1QFY16.
  • Operating profits declined, dipping into the negative during the quarter.
  • Net profit for the quarter dropped 82.5% YoY.
  • The company ended the quarter with an order book of Rs 1,162 bn, a 19% YoY rise.

Financial performance: A snapshot
(Rs m) 1QFY15 1QFY16 Change
Sales 50,676 42,808 -15.5%
Other operating income  874 809 -7.4%
Expenditure 49,371 45,710 -7.4%
Operating profit (EBDITA) 2,179 (2,093) -196.1%
Operating profit margin (%) 4.2% -4.8%  
Other income 3,478 4,924 41.6%
Interest 473 33 -93.0%
Depreciation 2,725 2,425 -11.0%
Profit before tax 2,459 373 -84.8%
Tax 524 34 -93.5%
Profit after tax/(loss) 1,935 339 -82.5%
Net profit margin (%) 3.8% 0.8%  
No. of shares   2,448  
Basic & Diluted earnings per share (Rs)*   5.1  
P/E ratio (x)*   51.5  
* On a trailing 12-months basis

What has driven performance in 1QFY16?
  • Revenues from the power segment declined 19% YoY, thus leading the fall in the overall revenues. Revenues from the industry segment however held steady, growing 1% YoY during the quarter.

  • The company saw a fall in raw material costs in absolute terms during the quarter. However, as a percentage of sales, they grew from 51.2% of sales in 1QFY15 to 55.5% of sales in 1QFY16. The other two cost heads of staff costs and other costs too had a similar story to tell. This led to the fall in operating margins during the quarter.

  • Other income grew 41.6% YoY. This along with the fall in interest expenses led to the company posting a positive bottomline, though lower by 82.5% YoY.

    Segment-wise performance
    (Rs m) 1QFY15 1QFY16 Change
    Power
    Revenue 41,442 33,571 -19.0%
    % share  79% 75%  
    PBIT margin 12.7% 6.4%  
    Industry
    Revenue 11,330 11,436 0.9%
    % share  21% 25%  
    PBIT margin 3.5% 0.3%  
    Gross Total*
    Revenue 52,772 45,007 -14.7%
    PBIT margin 10.7% 4.9%  
    * Excluding inter-segment adjustments & Excise Duty
What to expect?
Current market conditions have affected the operations adversely, resulting in the dull topline performance. Though the order book is enough, the company has not been seeing enough traction in execution of projects due to various issues such as getting clearance, land etc. The management has mentioned that it sees traction coming in from the third quarter of FY16 in terms of these issues. The decrease in profits is mainly due to the low level of operations.

The management has expressed its view that it sees the economy showing some signs of recovery, and expects industrial activity to continue to improve on the back of higher spending by the government. The government seems set to finalize a few big orders under the 'Make in India' initiative, and BHEL will be a beneficiary of some of them.

In the power sector, there is a visible improvement in fuel supplies, and core production is gradually improving. BHEL is already L1 (lowest bidder) in 5 GW worth of tenders, and another 15 GW or more are in the pipeline. There's a lot of tendering activity going on particularly from central and state sectors. Under solar PV sector too the management is seeing a lot of traction currently, and this is a segment that offers good opportunity to BHEL.

Overall, the management feels that things are moving in a promising direction, though the pace leaves a lot to be desired.

At the current price of Rs 265, the stock is trading at a P/E multiple of 51.5 times its trailing twelve month earnings. We are currently in the process of updating our FY18 estimates for the stock, and will come out with an updated view subsequently. Until then, we recommend that investors do not buy the stock at current levels.

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