BHEL (Q2 FY13)

India Infoline News Service | Mumbai |

Revenue growth for BHEL which had started to weaken over the past 2-3 quarters slowed further in Q2 FY13.

CMP Rs228, Target Rs204, Downside 10.6%
  • Topline of Rs105.6bn was lower than our expectation of Rs112.8bn due to lower execution in the industrial segment
  • The company has lowered sales to customers with higher payment cycle to rationalize its working capital
  • Operating margin for the quarter expanded by 21bps yoy and 371bps qoq on the back of lower other expenditure
  • PAT declined 9.7% yoy to Rs12.7bn due to a sharp decline in other income
  • Order book declined sequentially by 8% to Rs1.22tn due to weak order inflow of Rs32bn
  • Lower order inflows coupled with pressure on margins would lead to earnings de-growth over the next two years. Initiate with a SELL rating and 9-month price target of Rs204

Result table

(Rs mn) Q2 FY13 Q2 FY12 % yoy Q1 FY13 % qoq
Net sales 105,615 104,753 0.8 84,390 25.2
Material costs (61,326) (61,180) 0.2 (48,578) 26.2
Personnel costs (14,814) (13,491) 9.8 (13,950) 6.2
Other overheads (10,481) (11,466) (8.6) (9,816) 6.8
Operating profit 18,994 18,616 2.0 12,046 57.7
OPM (%) 18.0 17.8 21 bps 14.3 371 bps
Depreciation (2,163) (1,888) 14.6 (2,284) (5.3)
Interest (258) (96) 168.8 (79) 226.6
Other income 1,307 3,174 (58.8) 3,663 (64.3)
PBT 17,880 19,806 (9.7) 13,346 34.0
Tax (5,135) (5,686) (9.7) (4,137) 24.1
Effective tax rate (%) 28.7 28.7   31.0  
Adjusted PAT 12,745 14,120 (9.7) 9,209 38.4
Adj. PAT margin (%) 12.1 13.5 (141) bps 10.9 115 bps
Reported PAT 12,745 14,120 (9.7) 9,209 38.4
Ann. EPS (Rs) 20.8 23.1 (9.7) 15.0 38.4
Source: Company, India Infoline Research

Revenue growth remains flat at 0.8% yoy
Revenue growth for BHEL which had started to weaken over the past 2-3 quarters slowed further in Q2 FY13. The slowdown in growth is laregly due to execution issues faced in both power and industry segments. The industry segment revenue declined 30.6% yoy due to lower demand from industries like cement and metals. The power segment faced issues with delays in payment from clients, resulting into slower execution. International operations have faced execution issues in Syria and Yemen. During the earnings call, the management for the first time in recent quarters conceded to any execution delays due to client‐side problems. Execution for power projects is also expected to remain constrained given the issues in terms of clearances and funding, particularly for IPPs which form a major part of BHEL’s order book.

Order book continues to shrink qoq
Order book at the end of Q2 FY13 stood at Rs1.22tn with an order inflow of Rs31.5bn comprising of Rs19.4bn (1.4GW) orders from power segment and Rs12.5bn from industry. The company is yet to receive NTPC bulk tender orders which it expects to come through in H2 FY13. The management indicated that NTPC awards are seeing delays of 3-6 months, primarily on account of delays in land acquisition. The management expects to secure orders from projects by Rajasthan, Maharashtra, NPTC, NLC and AP, which are expected to be tendered in the near term. 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 remain steady yoy
In an environment of rising competition and lower revenue growth, BHEL managed to keep its operating margin healthy during the quarter. OPM for Q2 FY13 expanded by 21bps yoy and 371bps qoq as the company had executed high margin orders. EBIT margin in power segment reported an improvement of 290 bps yoy to 19.7%, while EBIT margins in industrial segment declined from 27% in Q2 FY12 to 21.3% in Q2 FY13. We expect margins to remain under pressure due to increased competitive intensity in BTG and decline in short term orders in industrial segment. Operating profit for the quarter was marginally higher by 2% yoy at Rs18.9bn, inline with our estimates.

Cost analysis
As a % of net sales Q2 FY13 Q2 FY12 bps yoy Q1 FY13 bps qoq
Material costs 58.1 58.4 (34) 57.6 50
Personnel Costs 14.0 12.9 115 16.5 (250)
Other overheads 9.9 10.9 (102) 11.6 (171)
Total costs 82.0 82.2 (21) 85.7 (371)
Source: Company, India Infoline Research

Business headwinds to keep earnings under pressure
BHEL’s revenue has witnessed de-growth over the last 3-4 quarters 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 Rs18bn versus nil 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. We initiate coverage on BHEL with a SELL rating and 9-month price target of Rs204.

Segmental analysis
As a % of net sales Q2 FY13 Q2 FY12 bps yoy Q2 FY13 Q2 FY12
Sales (Rs m)     in % Sales Contribution (%)
Power 89,580 77,973 14.9 81.3 72.5
Industry 20,549 29,603 (30.6) 18.7 27.5
Total 110,129 107,576 2.4    
           
EBIT (Rs m) &nb
BSE 89.90 0.25 (0.28%)
NSE 89.90 0.30 (0.33%)

***Note: This is a NSE Chart

 

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