BHEL: Beating expectations

The company reported superior operating performance with lower-than-expected rise in raw material costs

Bharat Heavy Electricals Limited’s (BHEL’s) robust sales growth of 25 per cent on year-on-year (y-o-y) basis at Rs 9,023 crore was largely on expected lines. The impressive figure on the operating profitability front in the December quarter was mostly due to a strong execution, improved revenue growth of 19 per cent in industry segment (23 per cent of sales) and continued high growth rate of 28 per cent in the power segment. Contrary to the expectations, the operating profit margin (OPM) surged 136 basis points (bps) to a three-year high (in any quarter) of 23 per cent.

While all sectors of the economy are witnessing a rise in prices of raw material, BHEL has been able to control the same as input costs in proportion to sales tanked 581 bps to 56 per cent. This has been followed by 200 bps drop in employee costs to sales (15 per cent).

Analysts believe the company has benefitted from higher operating leverage following expansion of capacity to 15,000Mw. However, a 16 per cent rise in taxation (Rs 662 crore) constrained net profit margin (15.5 per cent) expansion to 71 bps.

Bhel reported 18 per cent increase in order backlog--lower than 22.4 per cent in the September 2010 quarter at Rs 1,58,000 crore. Howover the year and 10 per cent sequentially in order inflows at Rs 12,200 crore was disappointing. The company has maintained its current year order inflow guidance of Rs 60,000 crore but will have to bag Rs 23,500 crore in March 2011 quarter, which will be the highest ever.

Going ahead, the company will continue to benefit from expanded capacity and strong revenue visibility (4.7 times financial year 2009-10 revenues). Robust order backlog will get a boost after the NTPC bulk tender order outcome (11X660 Mw worth Rs 25,000 crore) wherein the company is expected to bag a huge chunk.

However, long-term concerns, such as slower growth in order inflows from financial year 2011-12 and intensifying competition continue as the company has lost a few bulk orders from players such as Abhijeet Group (Rs 11,300 crore) and Reliance Power (Rs 37,700 crore) to Chinese and private Indian competitors.

The market welcomed the company’s financial performance in the third quarter and mainly superior operating performance as the stock ended 1.75 per cent higher at Rs 2,217.5 on Friday over its previous close. After under-performing at the Sensex in the last six months and trading at an attractive valuation of 16 times financial year 2011-12 average estimated earnings, analysts feel the stock at current levels provides a good entry point.