Revenue growth for BHEL which had started to weaken over the past 2-3 quarters continued to de-grew in Q4 FY13.
Topline of Rs192bn was higher than our expectation of Rs183bn with stronger execution in the power segment
Order inflows for the quarter jumped by 126.5% yoy driven by NTPC bulk tenders
Operating margin for the quarter shrunk by 98bps yoy due to a jump in other expenses; but OPM was higher than our estimate
PAT was much ahead of our expectations on account of higher revenues and better OPM
Sluggish order inflow momentum going ahead coupled with pressure on margins would lead to earnings de-growth over the next two years.
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|(Rs m)||Q4 FY13||Q4 FY12||% yoy||Q3 FY13||% qoq|
|OPM (%)||24.2||25.2||(98) bps||16.0||823 bps|
|Effective tax rate (%)||29.8||33.3||30.3|
|PAT margin (%)||16.9||17.3||-39 bps||11.6||530 bps|
|Ann. EPS (Rs)||10.6||55.2||(80.8)||19.3||(45.2)|
Top-line declines 2% yoy; no guidance for FY14
Revenue growth for BHEL which had started to weaken over the past 2-3 quarters continued to de-grew in Q4 FY13. The decline in revenues is largely due to execution issues faced in both power and industry segments. The industry segment revenue declined 7% 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 power segment faced issues with delays in payment from clients, resulting into slower execution. The management believes that the industry has bottomed out and expects revival from 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.
Order book at the end of Q4 FY13 stood at Rs1.15tn with an order inflow of Rs208bn. Chunk (81%) of the overall order inflow was contributed by power segment while remaining 10% and 9% was contributed by industry and international orders respectively. For the full year, the order inflow grew by 43% to Rs315.3bn in FY13 driven by NTPC bulk tenders. Booked orders of 9,627 MW in FY13 as compared to 3,934MW in FY12 was led by 5,940MW NTPC bulk tenders. Share of EPC orders in the overall order backlog stood at 20%. The management anticipates the share of EPC orders to go up significantly in the next few years and expects EPC to contribute 50% in the order book. 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 better than expectation; we expect it to decline
In an environment of rising competition and lower revenue growth, BHEL managed to restrict its decline in operating margin to 98bps yoy during the quarter to 24.2%. OPM was significantly higher than estimate of 21.1% despite revenue decline as company managed to control material cost and employee cost. Raw material cost as % of sales declined by 150bps on yoy basis and employee expense declined by 5bps on yoy basis. However, this was more than off-set by 253bps yoy increase in other expenditure. Other expenses increase was on account of – power & fuel, indirect material, some write-off on receivables and increase in temporary salaries in addition to increase in LDs (mainly from old projects). Surprisingly contraction in EBIT margin of power segment was much lower than expectations at 122bps yoy to 26.1%. While EBIT margins in industrial segment declined sharply from 30.4% in Q4 FY12 to 21.6% in Q4 FY13. We expect margins to remain under pressure due to increased competitive intensity in BTG and decline in short term orders in industrial segment.
|As a % of net sales||Q4 FY13||Q4 FY12||bps yoy||Q3 FY13||bps qoq|
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 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. Upgrade to Market Performer from SELL after the recent correction with revised 9-month price target of Rs189.
|As a % of net sales||Q4 FY13||Q4 FY12||bps yoy||Q4 FY13||Q4 FY12|
|Sales (Rs m)||in %||Sales Contribution (%)|
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