Bharat Heavy Electricals: Stellar Results; upbeat call: BofA ML

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Bharat Heavy Electricals
Stellar Results; upbeat call
􀂄 Street beating 2Q; Inflow +68%; PAT +33%; Raise PO Rs2960; Buy
BHEL had strong 2QFY11 with Rec PAT at Rs11.4bn +33%YoY (+11% consensus)
on good execution - sales +26%YoY (Power +28%), improved labour productivity,
lower provisions & taxes. EBITDA margin surprised at 19.2% +92bps despite 208bp
higher material costs. 2Q inflows +68% on large state & Pvt. IPP orders drove
backlog to Rs1.54tn (US$34bn) +22%YoY. Quality of earnings was better with 17%
fall in treasury income. On result call mgt. disclosed large order wins in Oct’10 and
pipeline of captive orders worth US$11bn. We raise our PO to Rs2960 (2850) on roll
forward. BHEL remains one of our top picks on 25% CAGR in EPS over FY10-13E
with backlog at 3.3x FY12E sales, peaked costs and improved competitiveness.
Upbeat call: Large orders & thrust on Industry to de-risk
Mgt. disclosed new orders of Rs72bn in Oct’10 (read our Bharat Heavy Electricals,
29 October 2010) and expect momentum well into 2H, which could create upside
risk to its inflow guidance of Rs600bn. Mgt. also highlighted potential pipeline of
17x800MW set orders from its captive JVs under-negotiation, which could add
orders worth Rs500bn ($11bn) in 2 years. They also highlighted steps taken to
scale-up in its industry domain (non-utility BTG business) as hedge to support long
term growth by a) upgrading power T&D portfolio in JV with Hitachi, b) scaling up
transport equipment portfolio by doubling diesel loco production, tie-up with Alstom /
GE to set-up new locomotive factory & metro rail products with Alstom and c)
compressor production with technology from GE.
Margin +92bps on higher productivity; Operating leverage next
We have been calling for operating leverage driven by capex to 15GW to kick-in
from 2Q to support margins and BHEL 2Q EBITDA margin +92bps support our
view. This was driven by solid execution, and improved labour productivity which
compensated for +208bps material cost on higher bought-outs for super-critical /
gas turbine execution. Rec. PAT +33%YoY despite +44% depreciation and 17%
lower treasury income as provisions for contracts were lower by ~Rs700mn
(unsustainable) and R&D benefits (200% deduction) cut its tax rate.