BHEL (Q3 FY13)

India Infoline News Service | Mumbai |

The company has lowered sales to customers with higher payment cycle to rationalize its working capital

CMP Rs225, Target Rs202, Downside 10.3% 
  • Topline of Rs102.1bn was lower than our expectation of Rs110.8bn 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 shrunk by 192bps yoy and 54bps qoq on the back of a jump in other expenditure

  • The disappointment in PAT was lowered by a sharp jump in other income

  • Order book declined sequentially by 7% to Rs1.1tn due to weak order inflow of Rs19.5bn

  • Lower order inflows coupled with pressure on margins would lead to earnings de-growth over the next two years. Maintain our SELL rating and 9-month price target of Rs202

Result table
(Rs mn) Q3 FY13 Q3 FY12 % yoy Q2 FY13 % qoq
Net sales 102,197 107,431 (4.9) 105,615 (3.2)
Material costs (55,878) (60,137) (7.1) (61,326) (8.9)
Personnel costs (14,373) (13,377) 7.4 (14,814) (3.0)
Other overheads (14,119) (13,113) 7.7 (10,481) 34.7
Operating profit 17,826 20,804 (14.3) 18,994 (6.1)
OPM (%) 17.4 19.4 (192) bps 18.0 (54) bps
Depreciation (2,198) (1,861) 18.1 (2,163) 1.6
Interest (509) (145) 251.1 (258) 97.3
Other income 3,324 1,960 69.6 1,307 154.3
PBT 18,443 20,758 (11.2) 17,880 3.1
Tax (5,139) (6,432) (20.1) (5,135) 0.1
Effective tax rate (%) 27.9 31.0   28.7  
Adjusted PAT 13,304 14,326 (7.1) 12,745 4.4
Adj. PAT margin (%) 13.0 13.3 (32) bps 12.1 95 bps
Reported PAT 13,304 14,326 (7.1) 12,745 4.4
Ann. EPS (Rs) 21.7 23.4 (7.1) 20.8 4.4
Source: Company, India Infoline Research

Topline declines 4.9% yoy on slower execution by clients

Revenue growth for BHEL which had started to weaken over the past 2-3 quarters slowed further in Q3 FY13. The slowdown in growth is largely due to execution issues faced in both power and industry segments. The industry segment revenue declined 5.5% 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. The company highlighted that it was going slow on supplies to few clients due to delay in payments (Indiabulls Power plants at Nasik and Amravati). 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 Q3 FY13 stood at Rs1.13tn with an order inflow of Rs19.5bn. However, in January 2013 alone the company has managed to book orders worth Rs41bn, taking the total orders booked in H2 FY13 till date to Rs60.5bn. The total orders booked worth Rs60.5bn consisted of Rs39.6bn from power sector, Rs14.7bn from industry segment and Rs7.3bn from exports. The orders include boiler order for NTPC’s Nabinagar plant (Rs28.8bn) and an electro-mechanical package for a hydro project in Bhutan (Rs7.5bn). BHEL expects to win Rs250-300bn orders in FY13E which implies incremental Rs100-150bn orders in Feb-March. BHEL is L1 in few projects like Suratgarh/Chhabra and OPCL which it expects to finalise in the near term. 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. 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 dips marginally qoq

In an environment of rising competition and lower revenue growth, BHEL managed to keep its operating margin during the quarter. OPM for Q3 FY13 dipped marginally by 54bps qoq to 17.4%, however it was lower by 192bps yoy as other expenditure increased. Operating margins were impacted due to negative operating leverage and higher LD charges and higher provisioning on account of delay in payment of retention money. EBIT margin in power segment reported a decrease of 68bps yoy to 18.3%, while EBIT margins in industrial segment declined sharply from 31.6% in Q3 FY12 to 18.3% in Q3 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 lower by 17.4% yoy at Rs17.8bn, lower than our estimates due to slower order execution.


Cost analysis
As a % of net sales Q3 FY13 Q3 FY12 bps yoy Q2 FY13 bps qoq
Material costs 54.7 56.0 (130) 58.1 (339)
Personnel Costs 14.1 12.5 161 14.0 4
Other overheads 13.8 12.2 161 9.9 389
Total costs 82.6 80.6 192 82.0 54
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 maintain our SELL rating on the stock with a 9-month price target of Rs202.


Segmental analysis
As a % of net sales Q3 FY13 Q3 FY12 bps yoy Q3 FY13 Q3 FY12
Sales (Rs m)     in % Sales Contribution (%)
Power 83,076 87,115 (4.6) 78.8 78.6
Industry 22,365 23,668 (5.5) 21.2 21.4
Total 105,441 110,783 (4.8)    
 
BSE 91.60 [0.10] ([0.11]%)
NSE 91.70 [0.05] ([0.05]%)

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