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BHEL: The margin kicker - Views on News from Equitymaster

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BHEL: The margin kicker

Oct 23, 2009

Performance summary
  • Sales grow 24% YoY in 2QFY10, aided by strong growth in the power segment.
  • Operating margins expand by a 3.7% YoY during the quarter owing to a fall in raw material costs and reduction in other expenditure (as percentage of sales).
  • Net profits increase by 39% YoY during the quarter, mainly due to the expansion in operating margins.
  • Order backlog stands at Rs 1,258 bn at the end of September 2009.

Financial performance: A snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Sales 53,426 66,252 24.0% 96,720 122,209 26.4%
Expenditure 46,319 54,957 18.6% 85,875 105,752 23.1%
Operating profit (EBDITA) 7,107 11,295 58.9% 10,845 16,457 51.7%
Operating profit margin (%) 13.3% 17.0%   11.2% 13.5%  
Other income 3,072 2,978 -3.1% 5,990 6,007 0.3%
Interest 22 45 104.5% 48 88 83.3%
Depreciation 744 934 25.5% 1,469 1,895 29.0%
Profit before tax 9,413 13,294 41.2% 15,318 20,481 33.7%
Tax 3,256 4,715 44.8% 5,315 7,196 35.4%
Profit after tax/(loss) 6,157 8,579 39.3% 10,003 13,285 32.8%
Net profit margin (%) 11.5% 12.9%   10.3% 10.9%  
No. of shares 489 489   489 489  
Diluted earnings per share (Rs)*         70.8  
P/E ratio (x)*         33.6  
* On a trailing 12-months basis

What has driven performance in 2QFY10?
  • The 24% YoY growth in BHEL’s topline during 2QFY10 was largely a result of a good performance from its ‘power’ segment, which grew its sales by 23% YoY. This segment contributed to a good 79% of the company’s total sales during the quarter (75% in 2QFY019). The second business segment of ‘industry’ couldn’t keep up the same pace as it grew its sales by 6.6%, in line with the general slowdown in capital expenditure in the economy. At the end of September 2009, the company’s order backlog stood at Rs 1,258 bn, about 4.8 times last fiscal’s annual sales.

    Segment-wise performance
    (Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
    Revenue 44,090 54,283 23.1% 79,177 99,971 26.3%
    % share 74.7% 78.5%   74.0% 77.3%  
    PBIT margin 17.3% 20.7%   17.9% 19.5%  
    Revenue 14,961 15,954 6.6% 27,812 29,279 5.3%
    % share 25.3% 23.1%   26.0% 22.7%  
    PBIT margin 15.1% 17.0%   14.6% 14.8%  
    Gross Total*            
    Revenue 59,051 69,165 17.1% 106,989 129,250 20.8%
    PBIT margin 16.7% 20.1%   17.1% 18.4%  
    * Excluding inter-segment adjustments

  • BHEL currently has a manufacturing capacity of 10,000 MW per annum for power plant equipment. Its increase in manufacturing capacity to 15,000 MW per annum, which was to be completed by December 2009, is mostly on track barring a few facilities which will be completed by March 2010.

    During the quarter, BHEL and MAHAGENCO signed a MOU to float a JV Company to build, own and operate a 2x660 MW thermal power plant with supercritical parameters at Latur in Maharashtra.

  • BHEL’s operating margins expanded by 3.7% YoY during 2QFY10. This was largely due to fall in the cost of raw materials coupled with a fall in other expenditure. The raw materials cost decreased from 59.5% of sales in 2QFY09 to 57.3% in 2QFY10.

  • The expansion in operating margins led BHEL to a 39.3% YoY growth in its bottomline during to quarter.

What to expect?
At the current price of Rs 2,380, the stock is trading at a multiple of about 25 times our estimated FY12 earnings. As far as the increasing competition in the power equipment business that is expected in the future is concerned, especially in the supercritical space, the management has indicated that what will help BHEL is the fact that the manufacturing of most of the components that go into the production of such equipment will be done in-house by the company. For the newer players, it will take some time to achieve this level of in house production and thus to that extent, the company will continue to enjoy higher margins. BHEL’s topline performance during the first half has been slightly higher than our estimates. However, given the stock’s high valuations, we maintain our cautious view on the same.

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