BHEL (Q1 FY14)

Downgrade the stock to SELL; Lower price target to Rs126

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs150, Target Rs126, Downside 16.0%

  • Q1 FY14 numbers were quite weak due to lower topline and high fixed costs
  • Topline of Rs64.5bn was lower by 23.5% yoy and quite lower than our expectation of Rs79bn
  • Order inflows for the quarter was down by 74% yoy at Rs14.7bn, order book was lower by 6% qoq to 1,086bn
  • Operating margins shrunk by 826bps yoy due lower revenues and high fixed costs;
  • Sluggish order inflow momentum going ahead coupled with pressure on margins would lead to earnings de-growth over the next two years.
  • Downgrade the stock to SELL; Lower price target to Rs126
Result table
(Rs m) Q1 FY14 Q1 FY13 % yoy Q4 FY13 % qoq
Net sales 64,581 84,390 (23.5) 192,044 (66.4)
Material costs (36,341) (48,578) (25.2) (106,288) (65.8)
Personnel costs (14,750) (13,950) 5.7 (14,391) 2.5
Other overheads (9,605) (9,816) (2.1) (24,850) (61.3)
Operating profit 3,886 12,046 (67.7) 46,515 (91.6)
OPM (%) 6.0 14.3 (826) bps 24.2 (1,820) bps
Depreciation (2,308) (2,284) 1.1 (2,889) (20.1)
Interest (278) (79) 251.4 (405) (31.5)
Other income 5,385 3,663 47.0 2,924 84.2
PBT 6,685 13,346 (49.9) 46,144 (85.5)
Tax (2,031) (4,137) (50.9) (13,766) (85.2)
Effective tax rate (%) 30.4 31.0
PAT 4,654 9,209 (49.5) 32,378 (85.6)
PAT margin (%) 7.2 10.9 (371) bps 16.9 (965) bps
Ann. EPS (Rs) 1.5 15.0 (89.9) 10.6 (85.6)
Source: Company, India Infoline Research

Top-line declines sharply by 23.5% yoy
BHEL registered a strong de-growth of 23.5% yoy in topline to Rs64.5bn on the back of lack of demand from the captive power plants and slower execution at the major power producers. The company has indicated that execution has been slower at the customer’s end due to lack of clearances for its projects and tight liquidity market conditions. The industry segment revenue declined 20.6% yoy due to lower demand from industries like cement and metals. The company highlighted that the demand scenario for captive power plants is bleak on account of lack of fuel availability and sluggish investment cycle. The management expects some revival in H2 FY14. However, no specific revenue guidance was issued by the company unlike it did historically. We expect execution for power projects and industry segment to remain constrained given the issues in terms of clearances and funding, particularly for IPPs and slowdown in investment cycle.

Outlook for order inflows remain sluggish
Order book at the end of Q1 FY14 stood at Rs1.06tn, lower by 6% on a qoq basis and 18% yoy. Order inflow for the quarter was lower by 74% yoy to Rs14.6bn due to lack of investments in the domestic power sector. The order inflow was for sales and spares and there was no new order for BTG. Of the total order book, power segment accounted by 82%, followed by 10% share of industrial segment and the rest 8% was from international orders. The company also saw an order cancellation of Rs12bn awarded by an Iraqi client in FY11.
The company highlighted that though private sector has taken a backseat in tendering for new orders, few of the Centre and State utilities have come up with tenders. The management expects 15,000MW of ordering in FY14, of which it expects to receive ~11,000MW. However, we expect risk of ordering delays and intense competition to keep order inflow potential subdued. In addition to this, lack of traction in industrial capex is expected to keep industrial orders capped going forward.

OPM shrinks due to high fixed costs
BHEL’s operating profit shrunk sharply on account of a drop in revenue and due to high fixed costs. OPM for the quarter stood at 6%, lower by 826bps yoy and the lowest in the last five years. Operating profit declined 67.7% yoy to Rs3.9bn, quite lower than expectations. Raw material cost as % of sales declined by 129bps on yoy basis restricting the decline in margins. Employee costs as a % of sales increased by 631bps yoy to 22.8%, leading to the decline in margins. Other expenditure too as a % of sales increased 324bps yoy to 14.9%. On a segmental basis, the decline in margins was more severe for the industrial sector. EBIT margins for the industrial sector shrunk 878bps yoy against 122bps for the power segment. We expect margins to remain under pressure due to increased competitive intensity in BTG and decline in short term orders in industrial segment.

Cost analysis
As a % of net sales Q1 FY14  Q1 FY13 bps yoy Q4 FY13 bps qoq
Material costs 56.3 57.6 (129) 55.3 93
Personnel Costs 22.8 16.5 631 7.5 1,535
Other overheads 14.9 11.6 324 12.9 193
Total costs 94.0 85.7 826 75.8 1,820
Source: Company, India Infoline Research

Business headwinds to keep earnings under pressure
BHEL’s revenue has witnessed de-growth over the last one year due to issues faced by its clients. Order momentum may continue to remain weak for some more quarters as issues on fuel, land and environmental policies would continue to hamper new project development. The tight liquidity situation at the client’s end would further lead to slower orders from the industrial segment.  BHEL’s balance sheet also deteriorated (debt of Rs26bn versus Rs4bn at end FY12) on higher Working capital requirement (due to low customer advances).  Lower order inflows coupled with pressure on margins would lead to earnings de-growth over the next two years. Downgrade from Market Performer to SELL with revised 9-month price target of Rs126.

Segmental analysis
As a % of net sales Q1 FY14 Q1 FY13 bps yoy Q1 FY14 Q1 FY13
Sales (Rs m)

in % Sales Contribution (%)
Power 155,392 155,738 (0.2) 78.2 76.9
Industry 43,409 46,789 (7.2) 21.8 23.1
Total 198,801 202,527 (1.8)


EBIT (Rs m)

in % EBIT contribution (%)
Power 40,616 42,602 (4.7) 81.3 75.0
Industry 9,363 14,201 (34.1) 18.7 25.0
Total 49,979 56,803 (12.0)    

EBIT margins (%)

in bps

Power 26.1

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