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BHEL: Dismal quarter - Views on News from Equitymaster

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BHEL: Dismal quarter
Nov 6, 2013

BHEL has announced second quarter results for the financial year 2013-2014. The company has reported 15.2% YoY decline in sales. Profit after tax has declined by 64.2% YoY. Here is our detailed analysis of the results.

Performance summary
  • Net sales for the company declined by 15% YoY in 2QFY14.
  • Revenues from both power and industry segments declined by 15% YoY each.
  • Operating profits declined by 78% YoY during the quarter.
  • As a result, EBITDA margin for the company has dropped down to 4.6% in 2QFY14 as compared to 18% in 2QFY13.
  • The company had a stupendous increase of 281% YoY in other income.
  • Net profit for the company dropped by 64% YoY.
  • However 2QFY14 results for BHEL includes results of its recently merged subsidiary-- Heavy Plates & Vessels Plant (HPVP); which was known as Bharat Heavy Plate & Vessels Limited (BHPV) before the merger. Hence, the revenue for BHEL looks inflated by Rs 166.9m; while profit before tax is lower by Rs 1.9 b. Adjusting the numbers for HPVP, profit before tax improves to Rs 8.2 bn (down 54.1% YoY) vs Rs 6.5 bn currently.

Financial performance snapshot
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 103,996 88,190 -15.2% 187,259 151,716 -19.0%
Operating income 1,619 1,654 2.1% 2,747 2,709 -1.4%
Expenditure 86,621 85,724 -1.0% 158,965 146,420 -7.9%
Operating profit (EBDITA) 18,995 4,119 -78.3% 31,041 8,005 -74.2%
Operating profit margin (%) 18.0% 4.6%   16.3% 5.2%  
Other income 1,307 4,979 281.0% 4,969 10,364 108.6%
Interest 259 247 -4.6% 338 524 55.0%
Depreciation 2,163 2,387 10.3% 4,447 4,695 5.6%
Profit before tax 17,880 6,465 -63.8% 31,225 13,150 -57.9%
Tax 5,135 1,905 -62.9% 9,272 3,936 -57.5%
Profit after tax/(loss) 12,745 4,560 -64.2% 21,954 9,214 -58.0%
Net profit margin (%) 12.1% 5.1%   11.6% 6.0%  
No. of shares         2,448  
Basic & Diluted earnings per share (Rs)         3.8  
P/E ratio (x)*         6.4  
* On a trailing 12-months basis

What has driven performance in 2QFY14 and 1HFY14?
  • BHEL's sales have declined by 15% YoY for the quarter on account of slow pace of execution.

  • BHEL's total material cost as a percentage of sales increased this quarter to 60.5% from 59% in 2QFY13. Other expenses too increased as a proportion of sales from 10.1% to 18.5% in 2QFY14. Other expenses increased by 8.4% YoY on an absolute basis. Other expenses include provision for doubtful debts of about Rs 3 bn. Also, staff cost increased by 4% YoY on an absolute basis. Hence, operating profit for the company declined by 78% YoY.

  • Both Power and Industry segments' revenues declined by 15% YoY each. EBIT margin for the power segment stands at 14.5% (down 5.3% YoY). On the other hand, Industry margin were negative as compared to 21.3% YoY in the last period's corresponding quarter. According to the management, the HPVP performance was included entirely in Industry segment. Therefore, impact of loss before tax of Rs 1.9 bn is seen on the 'Industry' margin. Adjusting for the same Industry margin has come in at about 11%.

  • Other income for the quarter increased by 281% YoY impacted largely by forex gain of Rs 3.7 bn. In the comparable quarter last year, the company had booked forex loss. Profit after tax declined by 64.2% YoY.

  • BHEL's order inflows for the quarter were at Rs 30 bn (down 5% YoY). There is a substantial improvement sequentially (104% QoQ; albeit on a lower base) in order inflows.

  • Order book for the company reduced by 16% YoY to Rs 1023 bn.

  • For 1HFY14, BHEL recorded decline of 19% YoY in sales. Operating profit dropped by 74% YoY; affected by lower margin orders as well as provisions. The company's net profits declined by 58% YoY.

    Segment-wise performance
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Power
    Revenue 89,544 75,764 -15.4% 157,237 129,550 -17.6%
    % share 81% 81%   80% 81%  
    PBIT margin 19.8% 14.5%   18.9% 14.3%  
    Industry
    Revenue 20,549 17,392 -15.4% 40,265 30,318 -24.7%
    % share 19% 19%   20% 19%  
    PBIT margin 21.3% -0.2%   21.1% 4.2%  
    Gross Total*
    Revenue 110,093 93,156 -15.4% 197,502 159,868 -19.1%
    PBIT margin 20.0% 11.7%   19.4% 12.4%  
    * Excluding inter-segment adjustments & Excise Duty
What to expect?
BHEL has reported a weak performance since two consecutive quarters. While sales have declined, more disappointing is the operating level performance. Provision for doubtful debts and other provisions related to contractual obligations and liquidated damages had a large part to play in raising the expenses. Also, merger of HPVP with BHEL has led to one time loss. We believe, FY14 will continue to be impacted by slow execution and thinning margins.

However, BHEL is comfortably placed in 5000 MW of orders which are to be awarded in the near future. Also, the company mentioned in the earnings call that ordering activity for 13th plan should begin from FY15. In addition, amongst the projects cleared or fast tracked by Cabinet Committee on Investment (CCI), BHEL also has interests in few. This may help BHEL improve its order inflow and in turn revenues and margins in years to come.

At the current price of Rs 134, the stock is trading at 6.5 times our estimated FY16 earnings. Factors such as poor revenue visibility on account of fall in order book and temporary execution issues will continue to hamper its performance for few more quarters to come. In light of this, we may have to revisit our estimates for the stock and shall update investors in case of any change in the same. We recommend investors to Hold on to the stock but not buy more of it given the uncertain near to medium scenario.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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