Friday, May 25, 2012

>BHEL: Q4FY2012 Result highlights

Audited results better than provisional results, however order inflow remains a concern

For Q4FY2012, the turnover of Bharat Heavy Electricals Ltd (BHEL) grew by 9%, which was slightly higher than the provisional numbers. The industry division’s revenues grew by a solid 26% year on year (YoY) while the power division reported a subdued 3% yearly growth. The operating margin at 23.9% for the quarter was an improvement of 253 basis points from Q4FY2011. The net profit of the company grew by 21% to Rs3,380 crore which was also 5% higher than the provisional net profit.

For FY2012, the turnover of the company grew by 14%. The net profits grew by 17%, that is, higher than the provisionally reported net profit of Rs6,868 crore. The company has modified the accounting policy on employee benefits during the year in respect of leave liability, which increased the profit before tax (PBT) by Rs180.5 crore in FY2012.

The management refrained from providing a concrete futuristic outlook. It however indicated that the margins could be maintained at healthy levels in view of its cost optimisation efforts and high indigenisation of technology. It indicated that the order inflow could pick up in the subsequent quarters. The company is also increasing focus on non-power sectors like railways, transport, power transmission and distribution etc, along with exports to diversify away the concentration risk faced from the power sector.

Estimates fine-tuned: While FY2012 results were above expectations, order inflow has been hugely disappointing. For FY2012 the company has reported a total order inflow of Rs22,096 crore, which is way below the FY2011 level of Rs60,507 crore. The order book stands at Rs135,000 crore, down 18% on a yearly basis. The current book-to-bill ratio of 2.7x is the lowest in at least the past 20 quarters, aggravating the concerns on the future growth path. In view of the low growth rate in order inflows, we have downgraded our sales assumption by 3% and 11% respectively for FY2013 and FY2014. We have also fine-tuned our estimates on the back of subdued growth in employee expenses and a lower tax rate. Overall, we are estimating a negative compounded annual growth rate (CAGR) of 1% in the top line and that of 2% in the adjusted earnings over FY2012-13.

Price target cut to Rs250 on poor future growth visibility: Overall, the company’s performance wa outstanding in terms of operating margins but disappointing on the order inflow front. The current bookto-bill ratio of 2.7x is the lowest in at least 20 quarters, aggravating the concerns on the future growth path. While the management has denied the probability of more order cancellations in the coming quarters, but the same cannot be ruled out in the current turbulent investment sentiments especially in the power generation space. It also said that there is a marginal delay in payment by clients, which is reflected in the elongated working capital cycle. The supercritical orders expected from NTPC could boost the company’s order book in the coming quarters. But these orders are largely priced-in now. At the current market price, the stock trades at 7.5x FY2014E earnings. In view of the above concern, we are also downgrading our target multiple to 9x (last six monthly average) from the earlier 12x. We have revised our price target to Rs250 (9x FY2014E). We maintain our Hold rating on the stock.