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BHEL: Raw materials spoil the show - Views on News from Equitymaster

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BHEL: Raw materials spoil the show
Oct 24, 2008

Performance summary
  • Sales grow 35% YoY in 2QFY09, aided by strong growth in both power and industry segments.
  • Operating margins contract by a huge 4.2% YoY during the quarter owing to big spike raw material costs (as percentage of sales).
  • Net profits decline by 11% YoY during the quarter, mainly due to the shrinkage in operating margins and drop in other income.
  • Order backlog stands at Rs 1,040 bn at the end of September 2008.


Financial performance: A snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Sales 39,654 53,426 34.7% 71,993 96,719 34.3%
Expenditure 32,702 46,319 41.6% 61,934 85,874 38.7%
Operating profit (EBDITA) 6,952 7,107 2.2% 10,059 10,844 7.8%
Operating profit margin (%) 17.5% 13.3% 14.0% 11.2%
Other income 5,009 3,072 -38.7% 7,072 5,990 -15.3%
Interest 193 22 -88.6% 214 48 -77.8%
Depreciation 694 744 7.1% 1,384 1,469 6.2%
Profit before tax 11,074 9,414 -15.0% 15,533 15,317 -1.4%
Tax 4,197 3,256 -22.4% 5,767 5,315 -7.8%
Profit after tax/(loss) 6,877 6,158 -10.5% 9,766 10,002 2.4%
Net profit margin (%) 17.3% 11.5% 13.6% 10.3%
No. of shares 488 488 488 488
Diluted earnings per share (Rs)* 59.1
P/E ratio (x)* 19
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • The 35% YoY growth in BHEL’s topline during 2QFY09 was largely a result of a strong performance from its ‘power’ segment, which grew sales by 33% YoY. This segment contributed to 75% of the company’s total sales during the quarter (73% in 2QFY08). The second business segment of ‘industry’ grew its sales by 20% YoY during 2QFY09. At the end of 2008, the company’s order backlog stood at Rs 1,040 bn, over 5 times last fiscal’s annual sales. The company continues to bag big orders, as can being seen by the strong Rs 143 bn of order inflows during the quarter.

    Segment-wise performance

    (Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
    Power            
    Revenue 33,039 44,090 33.4% 60,401 79,177 31.1%
    % share 72.7% 74.7%   73.6% 74.0%  
    PBIT margin 23.1% 17.3%   21.5% 17.9%  
    Industry            
    Revenue 12,422 14,961 20.4% 21,620 27,812 28.6%
    % share 27.3% 25.3%   26.4% 26.0%  
    PBIT margin 14.1% 15.1%   9.7% 14.6%  
    Gross Total*            
    Revenue 45,461 59,051 29.9% 82,021 106,989 30.4%
    PBIT margin 20.7% 16.7%   18.3% 17.1%  
    * Excluding inter-segment adjustments

    BHEL currently has a manufacturing capacity of 10,000 MW per annum for power plant equipment. It is further enhancing its manufacturing capacity to 15,000 MW per annum to be completed by December 2009. The management has indicated of a capex of Rs 42 bn during the eleventh five-year plan (FY08 to FY12). Besides capacity augmentation of existing products in the areas of thermal, gas, hydro and nuclear, other major areas of investment shall include facilities for higher rating nuclear sets, 765kV transformers and other associated distribution and transmission equipment and capacity augmentation of transformers from 20,500 MVA to 45,000 MVA.

    BHEL has signed a MoU with Heavy Engineering Corporation Ltd. to form a JV company for the supply of castings and forgings, with the motive of easing the supply of critical input material for manufacture of power plant equipment.

  • BHEL’s operating margins declined by 4.2% YoY during 2QFY09. This was largely due to a big spike in the cost of raw materials coupled with a marginal increase in its staff costs on account of an additional provision for wage revision. The raw materials cost increased from 64.1% of sales in 2QFY08 to 67.8% in 2QFY09.

  • The contraction in operating margins along with a lower other income when compared to the same quarter last year led BHEL to a 10.5% YoY decrease in its bottomline during to quarter. The other income during the quarter was lesser by 39% YoY, while depreciation expenses increased by a marginal 7% YoY. The fall in the other income was partly due to the one time impact of income tax refund in the figures for 2QFY08.

What to expect?
At the current price of Rs 1,100, the stock is trading at a multiple of 11.1 times our estimated FY11 earnings. BHEL’s topline performance during the first half has been in line with our estimates. However, the company is likely to underperform our full year operating margins target, which are anyways conservative. However, given the stock’s attractive valuations, we maintain our positive view on the same from a 2 to 3 years perspective.

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