Bharat Heavy Electricals: Powering ahead

Robust order backlog boosted revenues in the September quarter, but benefits of low-cost inventory were exhausted.

Bharat Heavy Electricals Ltd (BHEL) reported better-than-expected sales growth of 26 per cent year-on-year (y-o-y) at Rs 8,491 crore, aided by better execution, a 28.3 per cent surge in power revenues (Rs 6,965 crore or 79 per cent of total sales) and 16.5 per cent growth in the industry segment.

However, operating profit margin rose just 90 basis points to 19.2 per cent as more low-cost inventory was exhausted compared to the year-ago quarter. The share of raw material to sales jumped 400 basis points (bps) to 63 per cent, but the company managed to control other costs. Consequently, net profit margins inched just 70 basis points higher to 13.5 per cent, followed by higher depreciation and lower other income.

The medium-term outlook for the company in terms of sales and profitability is sanguine, courtesy expanded capacity (15,000 Mw), high revenue visibility (4.6 times 2009-10 sales) on the back of robust order backlog of Rs 1.54 lakh crore and strong order inflows (69 per cent up at Rs 13,500 crore in the September quarter).

The company sticks to its earlier 2010-11 order inflow guidance of Rs 60,000 crore and has achieved 50 per cent of the target. However, competition in the power equipment space is heating up, with many new players now qualified to bid for large orders. The Bharat Forge-Alstom joint venture emerging as the lowest bidder in NTPC-DVC’s 7,260 Mw super-critical turbine-generator bulk tender, instead of BHEL, has put a question mark on the sustainability of latter’s strong hold in the space.

Larsen & Toubro-Mitsubishi Heavy Industries joint venture is BHEL’s biggest competitor. It will vigorously contend for orders after losing out in NTPC’s turbine-generator bulk tender. Going ahead, all this can affect the company’s ability to win orders and may affect margins amid pricing pressure. Analysts expect 20 per cent upside from the current level of Rs 2,484.95, as it trades at an attractive valuation of 18 times 2011-12 estimated earnings.