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BHEL: Industry segment steals the show
Nov 18, 2011

BHEL has announced second quarter results of financial year 2011-2012 (2QFY12). The company has reported 23.7% YoY growth in sales while its net profits have grown by 23.6% YoY. Here is our analysis of the results.

Performance summary
  • Sales grow by about 23.7% YoY in 2QFY12. Growth aided by a 78.2% YoY increase in the company's 'Industry' segment. Despite a challenging business environment the 'Power' segment also managed to record a modest growth of 10.5% YoY during the quarter.
  • Operating margins contract by 0.6% YoY during the quarter owing to a rise in other expenditure as a percentage of sales.
  • Net profits increase by 23.6% YoY during the quarter. This is mainly due to the rise in other income partially offset by increase in interest and depreciation expenses.
  • Accounting changes in leave encashment boosted the profit before tax by Rs 1,660 m.
  • The order book at the end of the quarter stands at Rs 1.61 tn.

Financial performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 83,284 102,986 23.7% 148,081 174,243 17.7%
Operating income 1,622 2,469 52.2% 2,836 3,927 38.5%
Expenditure 68,582 85,863 25.2% 124,943 147,446 18.0%
Operating profit (EBDITA) 16,324 19,592 20.0% 25,974 30,724 18.3%
Operating profit margin (%) 19.6% 19.0%   17.5% 17.6%  
Other income 1,620 2,199 35.7% 3,255 4,685 43.9%
Interest 59 97 64.4% 98 184 87.8%
Depreciation 1,341 1,888 40.8% 2,610 3,597 37.8%
Profit before tax 16,544 19,806 19.7% 26,521 31,628 19.3%
Tax 5,121 5,686 11.0% 8,422 9,352 11.0%
Profit after tax/(loss) 11,423 14,120 23.6% 18,099 22,276 23.1%
Net profit margin (%) 13.7% 13.7%   12.2% 12.8%  
No. of shares         2,447.5  
Basic & Diluted earnings per share (Rs)         9.1  
P/E ratio (x)*         10.3  
* On a trailing 12 months basis

What has driven performance in 2QFY12?
  • The 23.7% YoY growth in BHEL's topline during 2QFY12 was largely a result of a robust performance from its 'Industry' segment'. Sales from the 'Industry' segment increased 78.2% YoY while the 'Power' segment grew at a modest pace of 10.5% YoY during the quarter.

  • The order intake during the quarter stood at Rs 143 bn. Earlier in the year, the company had guided for a 10% growth in order book. But considering that the order inflows have declined 31.0% YoY in 1HFY12, we believe that achieving the full year target would be a really challenging task for the company.

    Segment-wise performance
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Power
    Revenue 70,547 77,973 10.5% 124,280 135,776 9.3%
    % share 81% 72%   80% 75%  
    PBIT margin 20.1% 16.9%   20.0% 16.7%  
    Industry
    Revenue 16,608 29,603 78.2% 30,487 46,132 51.3%
    % share 19% 28%   20% 25%  
    PBIT margin 20.3% 27.0%   17.4% 25.4%  
    Gross Total*
    Revenue 87,155 107,576 23.4% 154,767 181,908 17.5%
    PBIT margin 20.1% 19.7%   19.5% 18.9%  
    * Excluding inter-segment adjustments

  • BHEL's operating margins contracted by 0.6% YoY during 2QFY12. This was largely due to increase in other expenditure as a percentage of sales. However, staff costs declined from 15.2% in 2QFY11 to 13.1% in 2QFY12 due to changes in accounting related to leave encashment expenses.

  • Strong growth at the operating level and rise in other income led BHEL to post a growth in net profits of about 23.6% YoY during to quarter.

What to expect?
At the current price of Rs 276, the stock is trading at a multiple of 8.2 times our estimated FY14 earnings. Although the valuations appear to be extremely attractive and the current quarter results were also encouraging 1) slowdown in the investment cycle due to rising interest rates and 2) coal linkages and environmental issues plaguing the power sector have proved to be a huge overhang on the company. However, with the government contemplating to impose import duty on Chinese equipments, fears of further loss in market share have been alleviated to a certain extent. Nonetheless, right now the market is primarily concerned about the slowdown in order inflows. It may be noted that order inflows in the first half have already declined by 31.0% YoY. Further, as majority of the backlog caters to the power segment execution worries also remain.

We believe that the next 2-3 quarters would be extremely challenging for the company. However, the long term prospects remain bright considering the power deficit issues in the country. As a result we maintain our positive view on the stock.

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