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BHEL: Buoyancy continues

Oct 29, 2004


Engineering major, BHEL, has declared good results for 2QFY05. The company has posted a 12% YoY increase in topline while bottomline of the company has grown by 56%. The operating margins have improved marginally, while the net profit margin grew by over 2% owing to lower extraordinary expenses.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 17,031 19,137 12.4% 28,301 31,893 12.7%
Expenditure 15,106 16,913 12.0% 26,340 29,272 11.1%
Operating profit (EBDITA) 1,925 2,224 15.5% 1,961 2,621 33.7%
Operating profit margin (%) 11.3% 11.6% 6.9% 8.2%
Other income 845 935 10.7% 1440 1721 19.5%
Interest 119 172 44.5% 230 296 28.7%
Depreciation 471 516 9.6% 964 1026 6.4%
Profit before tax 2,180 2,471 13.4% 2,207 3,020 36.8%
Extraordinary items (616) (1) -99.8% (813) (180) -77.9%
Tax 554 888 60.3% 494 1023 107.1%
Profit after tax/(loss) 1,010 1,582 56.6% 900 1,817 101.9%
Net profit margin (%) 5.9% 8.3% 3.2% 5.7%
No. of shares (m) 244.8 244.8 244.8 244.8
Diluted earnings per share (Rs)* 16.5 25.8 7.4 14.8
P/E ratio (x) 42.8
(* annualised)

Business profile
Bharat Heavy Electricals Limited (BHEL) is India's largest engineering company with market leadership in the power sector. In power, the company is into setting up thermal, nuclear, gas, diesel and hydro power plants. The company till date accounts for 64% of India's installed power capacity (69,129 MW). Power business forms around 65% of the company's total revenues. The PBIT margins from this segment stand at around 20%. The company has strong ties with NTPC, and historically, BHEL has bagged around 85% of the contracts floated by NTPC. The current outstanding order book position of the company stands at Rs 288 bn. In power business, BHEL is mainly into manufacturing and installing power generation equipments and is the market leader in the same. Its industrial business includes power transmission, transportation, telecommunication and renewable energy.


Sales: The topline of the company grew on the back of a 21% growth in power revenues. However, revenues from industry segment saw a decline of 2%. The company booked orders worth Rs 81 bn during the quarter, which was significantly higher by 39% YoY. The current outstanding order book position of the company is strong at 3.3 times its FY04 revenues. Thus, we believe that the company's revenues buoyancy is likely to continue over the next couple of years. Considering the upturn in the investment cycle, we believe a healthy double-digit growth is sustainable in the industry as well as the power segment.

Operating margins: The margin improvement can be attributed to inventory clearance and savings made by company on staff cost owing to VRS. The staff cost as a percentage to sales came down to 21% from 26% in the same quarter last year. While industry segment continued to earn higher margin, the power segment of the company witnessed a decline in the PBIT margins. But investors should remember that as power projects reach completion, revenues starts accruing at the faster rate. So, for the power division, margins normally tend to improve towards the year-end.

Segmental break-up 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Power 10,713 12,948 20.9% 18,993 22,063 16.2%
PBIT margins (%) 24.5% 20.4% 20.50% 17.3%
Industry 6,920 6,749 -2.5% 10,399 11,017 6.0%
PBIT margins (%) 19.2% 13.3% 10.5% 8.5%

Net profit margins: Apart from the improved performance at the operating level, which is reflected in the bottomline, higher other income (up 11%) and lower extra ordinary expenditure (almost nil) also helped the company post a growth of 56% in net profit. If one excludes the extraordinary expense effect, the profit before tax in the quarter has grown at 13%.


At the current price of Rs 636, the stock trades at a P/E multiple of 42.8x annualised 1HFY05 earnings. However, an investor must remember that the first two quarters are not the true reflection of an engineering companyís annual performance. The third and fourth quarters are likely to clock a much stronger growth rate. At the current price, the stock trades at 17.4 times our FY05 earnings estimates.

Since, both private and state owned power companies in India are expected to add huge generation capacities, they will continue to be a source of sustainable growth in BHELís order book size. Apart from that, industrial recovery and company's success in overseas market will add a punch to its performance in the long run. BHELís track record of installing 65% of the Indiaís thermal power generation capacity also speaks for its expertise in installing power plants. While the strengthening order book size of the company ensures topline growth, the margins of its power and industry segment are likely to sustain in medium term. To this extent, the future prospects of the company look buoyant.


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