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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) 2QFY02 2QFY03 Change 1HFY02 1HFY02 Change
Sale of electrical energy 5,854 6,470 10.5% 11,689 12,666 8.4%
Income from EPC, contracts & computer division 1,301 751 -42.3% 2,048 1,502 -26.6%
Total operating income 7,154 7,220 0.9% 13,738 14,168 3.1%
Other Income 204 223 9.3% 337 324 -3.8%
Expenditure 5,920 6,178 4.4% 11,006 11,576 5.2%
Operating Profit (EBDIT) 1,234 1,043 -15.5% 2,732 2,592 -5.1%
Operating Profit Margin (%) 17.3% 14.4%   19.9% 18.3%  
Interest 136 169 24.1% 300 329 9.7%
Depreciation 527 697 32.2% 1,035 1,282 23.9%
Profit before Tax 775 400 -48.4% 1,734 1,305 -24.7%
Tax 44 20 -54.2% 114 78 -31.1%
Profit after Tax/(Loss) 732 380 -48.1% 1,620 1,227 -24.3%
Net profit margin (%) 12.5% 5.9%   13.9% 9.7%  
No. of Shares (eoy) (m) 137.8 137.8   137.8 137.8  
Diluted Earnings per share* 21.2 11.0   23.5 17.8  
*(annualised)            
Current P/e ratio   18.6     11.5  

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) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Cost of energy purchased 3,072 3,376 9.9% 5,571 6,221 11.7%
Cost of fuel 940 941 0.2% 2,072 2,057 -0.7%
Cost of material & other direct
expenses (EPC and contracts)
1,045 611 -41.6% 1,703 1,239 -27.3%
Tax on electricity 128 88 -31.4% 246 203 -17.3%
Staff cost 260 310 19.2% 501 579 15.5%
Other expenses 476 852 79.0% 914 1,278 39.9%
Total expenditure 5,920 6,178 4.4% 11,006 11,576 5.2%

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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