>BHEL (CITI)

Hold: PAT Disappoints; Positive Surprise on Inflow Momentum

■ PAT disappoints — 1QFY10 PAT at Rs4.7bn up 22% YoY was 7% below CIRA estimates and 12% below Bloomberg consensus on higher staff costs and marginally higher raw materials costs. The staff costs in 1QFY09 looked unusually high given that FY10E management staff cost guidance is Rs45bn.

■ Raw material costs will ease from 2QFY10 — Raw material costs were higher in 1QFY10 due to: 1) Use of high cost inventory (9-10 months old) till May09; and 2) Work done on ONGC Hazira, Pragati and one more gas turbine where value added was low. BHEL has started using the inventory bought in Sep08 from Jun09 and as a consequence raw materials costs should ease from 2QFY10.

■Order inflow momentum surprises on the upside — Rs126bn of orders in 1QFY10 ahead of CIRA expectations of Rs70bn. Company expects to announce 3.6GW (~Rs72bn) of private sector orders this week. Order inflow guidance for FY10E has been hiked to Rs550bn from Rs500bn at the start of year and the company expects to book Rs550bn of orders in FY11E also. The bulk NTPCDVC
order is likely to be booked in the first month of FY11E. The order inflow momentum is a clear sign of the perceptible shift from Chinese equipment suppliers to BHEL in the private sector.

■ FY10E consensus and CIRA estimates seem aggressive — Management reiterated FY10E sales guidance of 25% YoY and PAT guidance of 30% YoY. CIRA and consensus EPS estimates are 10% and 8% higher than management EPS guidance of Rs83. The management conference call is tomorrow.

To see full report: BHEL