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BHEL: Order book declines

Oct 29, 2012

Bharat Heavy Electricals Ltd (BHEL) has announced second quarter results of financial year 2012-2013 (2QFY13). The company has reported a 1.0% YoY growth in sales while its net profits have declined by 9.7% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by about 1.0% YoY in 2QFY13.
  • Operating profits increase by 2.0% YoY while the operating margins increase marginally to 18.0% during the quarter.
  • Net profits decline by 9.7% YoY during the quarter mainly due to a 58.8% YoY fall in other income.
  • The order book at the end of the quarter stands at Rs 1,223 bn. It has declined 8.0% QoQ as order inflows have been muted.

Financial performance snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Sales 102,991 103,996 1.0% 174,225 187,259 7.5%
Operating income 1,763 1,619 -8.1% 2,698 2,747 1.8%
Expenditure 86,137 86,621 0.6% 148,123 158,965 7.3%
Operating profit (EBDITA) 18,616 18,995 2.0% 28,800 31,041 7.8%
Operating profit margin (%) 17.8% 18.0%   16.3% 16.3%  
Other income 3,174 1,307 -58.8% 6,609 4,969 -24.8%
Interest 96 259 168.3% 184 338 83.5%
Depreciation 1,888 2,163 14.6% 3,597 4,447 23.6%
Profit before tax 19,806 17,880 -9.7% 31,628 31,225 -1.3%
Tax 5,686 5,135 -9.7% 9,352 9,272 -0.9%
Profit after tax/(loss) 14,120 12,745 -9.7% 22,275 21,954 -1.4%
Net profit margin (%) 13.5% 12.1%   12.6% 11.6%  
No. of shares         2,447  
Basic & Diluted earnings per share (Rs)         9.0  
P/E ratio (x)*         8.0  
(*trailing twelve month earnings)

What has driven performance in 2QFY13?
  • A modest 1% YoY growth in BHEL's topline during 2QFY13 was largely a result of 30.6% YoY fall in revenues from the industry segment. However, revenues from the power segment increased 14.9% YoY.

  • It may be noted that apart from ongoing execution issues sales growth was impacted as the company deliberately held back dispatches of equipments since debtor liquidation is taking longer than usual. The sales growth from the industry segment was impacted as there were no short cycle orders from that segment during the quarter (Short cycle orders culminate quickly and thus translate into revenue growth).

  • The current order book stands at Rs 1,223 bn. Roughly 79% of the order book is from power sector. The company registered an order inflow of Rs 31.5 bn in 2QFY13. In mega watt terms, the company booked 1,423 MW of orders during the quarter. Out of the total inflow, roughly Rs 19.4 bn of the orders were from the power sector and Rs 12.1 bn from the industry sector with the balance coming from exports.

    Segment-wise performance
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Revenue 77,973 89,581 14.9% 135,776 157,300 15.9%
    % share< 72% 81%   75% 80%  
    PBIT margin 16.9% 19.7%   16.7% 18.9%  
    Revenue 29,603 20,549 -30.6% 46,132 40,265 -12.7%
    % share< 28% 19%   25% 20%  
    PBIT margin 27.0% 21.3%   25.4% 21.1%  
    Gross Total*            
    Revenue 107,576 110,129 2.4% 181,908 197,566 8.6%
    PBIT margin 19.7% 20.0%   18.9% 19.4%  
    * Excluding inter-segment adjustments & Excise Duty

  • BHEL's operating margins were more or less flat during 2QFY13. Operating profits, too, grew at a modest pace of 2% YoY due to flattish growth in topline. Margins from the power segment improved due to currency impact while that from the industry segment fell due to absence of short cycle orders.

  • Net profits declined by 9.7% YoY. This was mainly due to 58.8% YoY fall in other income and 168.3% YoY rise in interest expenses. Other income fell as receipt of advances from new orders fell. It may be noted that the company invests the advances received from clients. And since advances fell, the income fell accordingly.

What to expect?
It may be noted that in the previous conference call, management had stated that it expects 10,000 to 15,000 MW of order tendering in the market as a whole. And majority of these orders would be from the government sector. Though the overall tendering in this quarter was not that good, management is confident the same would pick up in the next 2-3 quarters. That is because all the bids that are expected to come in the next 2-3 quarters already have coal linkages in place. This signifies that the situation is likely to improve in the near term at least on the order book front. However, falling client advances and rising working capital can prove to be a challenge for the company. Nonetheless, considering the long term prospects, attractive valuations and cor-relation between power sector and India growth story we maintain our Buy rating on the stock.

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