• OCTOBER 30, 2003

BHEL: Industrial fillip…

Engineering major, BHEL has posted good results for 1HFY04. The company’s topline has increased by 20% where as the bottomline for the first half has grown significantly by 54%. The company’s operating margins have also improved marginally. However, despite a 466% higher tax adjustments, company has improved net profit margins by 70 basis points.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Gross sales 14,368 17,217 19.8% 23,915 28,711 20.1%
Other Income 564 645 14.4% 799 1033 29.3%
Expenditure 12,724 15,080 18.5% 22,120 26,333 19.0%
Operating Profit (EBDIT) 1,644 2,137 30.0% 1,795 2,378 32.5%
Operating Profit Margin (%) 11.4% 12.4%   7.5% 8.3%  
Interest 120 120 0.0% 238 231 -2.9%
Depreciation 469 475 1.3% 902 965 7.0%
Profit before Tax 1,619 2,187 35.1% 1,454 2,215 52.3%
Extraordinary expenses 387 596 54.0% 770 793 3.0%
Tax 147 562 282.3% 89 504 466.3%
Profit after Tax/(Loss) 1,085 1,029 -5.2% 595 918 54.3%
Net profit margin (%) 7.6% 6.0%   2.5% 3.2%  
No. of Shares (m) 244.8 244.8   244.8 244.8  
Diluted Earnings per share (Rs)* 17.7 16.8   4.86 7.50  
Current P/E ratio (x)   25.3     56.7  

In 2QFY04, the power business revenues grew by around 2% YoY but a significant growth of 56% in revenues from industry segment resulted in overall 20% growth in revenues for September quarter. The other income of the company increased by around 14%. Net profit margins for September quarter declined mainly due to higher tax provisions and higher extraordinary expenses due to one time payment for VRS, which will benefit the company in the long term. But the picture looks much stronger on half-yearly basis, as the company had posted good results for first quarter too.

Power remained the major contributor to the topline of the company in the first half as well as in the second quarter. However, the contribution of power business to topline for 2QFY04 has come down from 67% to 58% as industrial segment has grown at a much faster rate. PBIT margins from power business remained in line with last year. But margins from industrial segment have grown significantly. However, the management has not clarified the reasons for the higher margins yet. But in our view, the probable reasons for this are, the reducing manpower and entering in higher margin businesses like water treatment projects etc. More importantly, India Inc. has started investing in expanding capacities. Just to put things in perspective, BHEL has pruned its employee numbers by over 27% in the last 5 years to 45,500 in FY03. Moreover, the exercise looks likely to continue.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Power 10,415 10,657 2.3% 16,575 18,950 14.3%
PBIT 2,588 2,709 4.7% 3,870 3,978 2.8%
PBIT margin 24.8% 25.4%   23.3% 21.0%  
Industry 4,588 7,161 56.1% 8,482 10,852 27.9%
PBIT 315 1,482 370.5% 269 1,341 398.5%
PBIT margin 6.9% 20.7%   3.2% 12.4%  

BHEL has received orders worth Rs 41 bn in the second quarter and the outstanding orderbook size of the company has gone up to Rs 190 bn, which is around 2.6 times FY03 revenues. The orderbook size has grown by 41% YoY. What is more encouraging is that apart from traditional power sector orders, company has won water management contracts also. This too is a better margin business.

The company is targeting to increase its export contribution to revenues 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 BHEL’s overseas projects. This step will help BHEL to bid for higher value international contracts.

At the current price level of Rs 425, the stock trades at P/E multiple of 56.7x annualised 1HFY04 earnings. 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 traditionally). Second half has contributed more than 80% of the net profits in past years. Both private and state owned power companies in India are expected to add huge generation capacities, which will further provide strength of BHEL’s orderbook size going forward. BHEL’s track record of installing 65% of the India’s thermal power generation capacity also speaks for its expertise in installing power plants. Looking at the increasing orderbook size and constant endeavor of the company to improve operating margins, the company’s future looks bright. However, one needs to exercise caution, as much of this anticipated growth seems already factored in the company’s valuations.

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