Bharat Bijlee Ltd Improvement accelerates, upgrade to Buy :: Emkay

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Bharat Bijlee Ltd

Improvement accelerates, upgrade to Buy

BUY

CMP: Rs 1,088                                       Target Price: Rs 1,350

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n     PAT grow by 22% yoy and 160% qoq to Rs151mn (our expectations – Rs129mn) - driven by increase in EBITDA margins to 13.8%  

n     Higher EBITDA margins driven by both transformers (better margins on low base) and motors (volumes growth of 20% drive operational leverage)

n     Revenue growth at 8%, below expectations of 13% growth 

n     Maintain earnings; Valuations (EV) cheap on absolute basis at 3.9x FY12E EBITDA as well as relative basis at 20% discount to peers; Top pick in transformers pack; Upgrade to Buy

Improvement accelerates led by EBITDA margins

Bharat Bijlee reported 8% yoy growth in revenues to Rs1.8bn, slightly below estimates

of Rs1.9bn. The EBITDA margin improved to 13.8% (our estimate - 12.2%) from 12.4%

in Q2FY10 (+140bps yoy). The improvement is driven by (1) better transformers

margins on low base and (2) ~ 20% volume growth in motors business driven by

improvement in industrial capex. The volumes in transformers business remained

largely flat. The realizations improved by ~ 3% in both the businesses which is also

visible from the fact that raw material cost to sales dropped from 72.2% in Q2FY10 to

69.3% in Q2FY11. As a result of 140bps improvement in EBITDA margins, EBITDA and

PAT grew by 21% and 22% yoy to Rs255mn and Rs151mn (our expectations Rs235mn

and Rs129mn respectively).

Maintain earnings

For H1FY11, BBL has reported earnings of Rs37.1/Share (up 27% yoy). We see

improvement in numbers to continue through FY11E due to - (1) higher commodity

prices yoy driving absolute EBITDA in the transformer business, (2) pick up in the

motors business & (3) overall low base in FY10 (EBITDA margins of 10.7%). We expect

Q3FY11 to look much better led by very low margins in Q3FY10 (8.6%). We believe the

execution and deliveries is likely to pick up in Q3FY11 which will drive operational

leverage and further improve the margins. We maintain earnings estimate of

Rs96.1/116.4 for FY11E/12E.

Upgrade to Buy on valuations; Target Rs1350

BBL has a long-term investment in Siemens (2.8mn shares) and HDFC (0.10mn

shares). After according 50% discount to current market price of the above securities,

per share investment value for BBL works out to Rs245/Share. To value BBL, we have

removed the above value (Rs245/Share) from the CMP of Rs1087/Share. The stock is

trading (ex investment value) at attractive valuations of 7.2xFY12E earnings, 3.8xFY12E

EBITDA and 1.6xFY12E Book Value. The valuations are also cheap on relative basis at

20% discount to peers. On the back of (1) low base driving earnings CAGR of 26% in

FY10-12E, (2) cheap valuations and (3) performance track record, we upgrade the stock

to ‘Buy’ ratings. Bharat Bijlee is our top pick in the transformers pack. We have valued

BBL at Rs1350/Share, based on average EV/EBITDA (5.1x) of the industry.