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BSES: EPC volatility hits performance

Oct 28, 2002

BSES, one of India's leading private utilities, has declared a 4% growth in sale of electricity in 2QFY03 (1588 MUs). In value terms, revenues from sales of electricity has gone up by over 10% YoY during the quarter. The company's income from engineering contracts and computer division have taken a hit this quarter (down 42%). This has resulted in a marginal 1% growth in the company's operating income.

(Rs m)2QFY022QFY03Change1HFY021HFY02Change
Sale of electrical energy5,8546,47010.5%11,68912,6668.4%
Income from EPC, contracts & computer division1,301751-42.3%2,0481,502-26.6%
Total operating income7,1547,2200.9%13,73814,1683.1%
Other Income2042239.3%337324-3.8%
Operating Profit (EBDIT)1,2341,043-15.5%2,7322,592-5.1%
Operating Profit Margin (%)17.3%14.4%19.9%18.3%
Interest 13616924.1%3003299.7%
Profit before Tax775400-48.4%1,7341,305-24.7%
Profit after Tax/(Loss)732380-48.1%1,6201,227-24.3%
Net profit margin (%)12.5%5.9%13.9%9.7%
No. of Shares (eoy) (m)137.8137.8137.8137.8
Diluted Earnings per share*
Current P/e ratio18.611.5

While operating income growth slowed down, BSES was not able to prune its operating expenses in tandem. Consequently, the company saw a 16% dip in operating profit, with operating margins shrinking to 14.4% (17.3% last year). A significant 79% jump in other expenses seems largely responsible for the escalation in operating costs. Higher interest outgo as well as depreciation provisioning weakend profitability. Consequently, BSES reported a 48% dip in net profit in September quarter 2002.

Cost Breakup...
(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Cost of energy purchased3,0723,3769.9%5,5716,22111.7%
Cost of fuel9409410.2%2,0722,057-0.7%
Cost of material & other direct
expenses (EPC and contracts)
Tax on electricity12888-31.4%246203-17.3%
Staff cost26031019.2%50157915.5%
Other expenses47685279.0%9141,27839.9%
Total expenditure5,9206,1784.4%11,00611,5765.2%

BSES's problems continue to grow. On the one hand, the company's growth in the Mumbai circle is pegged at only 4%-5% per annum, its EPC and contracts business is too volatile for comfort. Right now, it is only earning from the Mumbai circle and its distribution ventures in Orrisa and Delhi are currently in the red. Its generation business in Kerala too is in losses. Due to non-payment of outstanding dues by Kerala State Electricity Board (KSEB), the Kerala plant has been shut down since October 2001. Also, the MERC order over stand by charges continues to hang in fire.

Though in the long term, BSES's investments in Kerala, Orrisa and Delhi are likely to bear fruit, in the short term the paucity of returns from these investments in hitting the company's operating performance. At Rs 205 the stock currently trades at 11.5x 1HFY03 annualised earnings. The valuations are on the higher side due to the poor September quarter numbers. The results are likely to dampen valuations over the medium term.

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