• OCTOBER 27, 2003

BHEL: What is expected?

BHELís stock price has witnessed an appreciation of 150% in last 10 months mainly due to increased orderbook and good growth prospects for the company. BHEL is about to announce its 3QFY04 results on 29th October 2003. In this context, consider what is expected in 2QFY04.

Being an engineering company, BHEL derives a larger share of revenues in the last quarter of a fiscal year in line with a completion of a contract (40% of revenues). As a result, first half results do not fully represent the fundamental improvement in order book position. In this context, first half has contributed to just around 30% to 35% of the total revenues for BHEL in the last three years.

Consider the 1HFY03 performance first. The topline performance of the company declined due to delayed shipments and order cancellation. However, both operating as well as net profit margins improved constantly, as company has reduced its employee strength by around 15% over last three years. as a prelude to 1HFY04 results, what happened in 1QFY04 is also of significance. In 1QFY04, BHEL managed to post impressive results as the topline grew by around 21% YoY and it managed to reduce its net losses for the quarter by around 76%.

The company has witnessed strong order inflows over last three years (CAGR of 15%). The order backlog of the company stood at Rs 164 bn by the end of 1QFY04. According to companyís press releases, it has received orders worth Rs 42 bn in last three months. In FY03, the company's export order inflow stood at Rs 14.6 bn, up by 82% YoY The company is targeting to increase its export contribution from current 13.5% to 17% over next five years. In order to strengthen its financial muscle, BHEL has entered into joint venture with Export-Import Bank of India to float a financial services company, which will take up the funding aspect of BHELís overseas projects. This step will help BHEL to bid for higher value international contracts.

Apart from its traditional business, BHEL has joined hands with NTPC for running and maintenance jobs of power plants, besides EPC and other jobs in upcoming power projects. It will further add another stable source of revenues for the company. However, this aspect is of long-term in nature.

At the current price level of Rs 423, the stock trades at P/E multiple of 16.2x FY04E earnings. BHEL derives 66% of the revenue from power sector. With power companies (both private and public) expected to add capacities, BHEL is likely to benefit. RBI has already issued bonds to public sector power generation units towards outstanding dues of SEB (State Electricity Board). NTPC is also planning to add another 20,000 MW by 2012. Looking at the BHELís track record or bagging 85% of the contracts floated by NTPC, BHEL could benefit. However, we expect a lower share of NTPC orders in the future owing to competition. Looking at the good 1QFY04 performance and the growing orderbook size, we expect that company to show better results for FY04.

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