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BHEL 2QFY11: Above est; EBITDA margin expands 64bp; Adj PAT up 33% YoY; Maintain Buy
- BHEL’s (BHEL IN, Mkt Cap US$27b, CMP Rs2,446, Buy) 2QFY11 revenue was up 28% YoY at Rs85b (est Rs78b, up 17.5% YoY). EBITDA margin expanded 64bp YoY at 19.2% (est 18.7%). Adj PAT was up 33% YoY at Rs11.4b (est Rs10b, up 16% YoY). 1HFY11 revenue growth was 22% YoY and PAT growth 38% YoY.
- Order backlog at end 2QFY11 stood at Rs1,540b with BTB ratio of 4.3x TTM. Order intake during 2QFY11 was Rs135b, up 68% YoY. Intake during 1HFY11 now stands at Rs243b, up 17% YoY. Implied order intake for 2HFY11 now stands at Rs357b based on management’s FY11 intake guidance of Rs600b.
- Power and Industry segment revenues improved by 28% YoY and 16.5% YoY. Power EBIT margin was 21.1% (up 48bp YoY) and Industry segment margin at 16.4% (down 46bp YoY).
Capacity to expand to 20GW, will ease execution challenges
- BHEL has indicated that overall shop floor production will touch 17GW in FY11 as compared to 11GW in FY10. This reflects the company’s enhanced ability to handle increased tonnage of steel in its plant which includes castings, steel pipes, valves, etc, on the back of enhanced capacity of 15GW.
- The company is well on track to expand capacity to 20GW per annum by FY12. We believe, with expanded capacity, it will be able to grow production at an accelerated pace in FY13-14.
Power division drives overall performance while Industrial business also remains a long term focus area
- Power segment revenues for 2QFY11 stood at Rs70b (up 28% YoY) while industrial segment revenues stood at Rs15b (up 16.4% YoY). Power division contributed 80% to total revenues while industrial division contributed 20%. EBIT margins for Power division expanded 48bp YoY to 21% while for Industry they were at 16.4%, down 46bp YoY.
- Benefits of the enhanced capacity to 15GW will be seen in 2HFY12 thereby ensuring robust execution ahead in the power segment. In the industry segment, BHEL has made forays into Railways (propulsion systems for locomotives of 700HP range with Alstom), Defense (naval guns), etc. Management foresees consistent revenue growth of 20-25% for this segment in the next 4-5 years driven by these new segments.
Raw material cost up 235bp YoY, adj EBIDTA margin expands 63bp to 19.2%
- Raw material cost during 2QFY11 stood at 59.6% (up 234bp YoY) while other expenditure was down 200bp on the back of Rs700-800m lower provisions.
- Staff costs were down 96bp YoY and stood at 15.2% to sales. 1QFY11 had a staff provisioning of Rs800m. Management has guided for overall staff costs of Rs53b for FY11.
Order intake of Rs135b, up 68%YoY; FY11E order intake at Rs628b (up 6% YoY)
- BHEL’s order book as at September 2010 stood at Rs1,540b (+22% YoY, +4% QoQ).
- During 2QFY11, BHEL reported order intake of Rs135b, up 68% YoY. Large part of the intake during 2QFY11 was in the form of i) 2X600MW order from Dainik Bhaskar (Rs26b), ii) 4X270MW order from Abhijeet Infra IPP (Rs25b), and iii) 2X600MW order from Visa Power (Rs27b). BHEL has also received Part-II orders for i) 5X270MW Indiabulls Nashik, ii) 5X270MW Indiabulls Amravati, and iii) 600MW order from APGENCO post Sept-2010. Aggregate value of these orders is Rs70b.
- Order intake in FY11 is likely to be robust, given: i) Bulk tendering of super critical projects (11 sets of 660MW each), ii) project awards by joint ventures (Madhya Pradesh 2X660/800 at Khandwa and with Maharashtra for 2X660MW at Latur), and iii) accelerated award by private players / state utilities / CPSUs.
- For FY11, we expect BHEL’s inflows to touch Rs628b, up 6% YoY.
Net current assets up Rs15b over March 2010 levels
- BHEL’s September 2010 Net current assets are up Rs15b from March 2010 end levels of Rs105b. This is mainly on the back of higher debtors (largely due to increase in retention money). Debtors are up Rs14b over March 2010 and now stand at Rs22b.
Takeaways from 2QFY11 results conference call
- Order intake during the quarter stood at Rs135b, up 65% YoY. For 1HFY11, order intake was Rs243b, up 17% YoY. Order book is Rs1,540b, up 8% since the beginning of the year.
- Order intake continues to be strong in 3QFY11. In the month of October so far, BHEL has received three large orders, including 5x270 MW from Indiabulls (Nashik), 5x270 MW from Indiabulls (Amravati) and 1x600 MW from AP Genco. Order inflow in 3QFY11 till date is Rs70b.
- Demand outlook remains positive, and order inflow is likely to exceed FY11 guidance of Rs600b.
- Profitability will continue to be healthy, and will be maintained despite RM volatility.
- Wage cost will be Rs53b in FY11 (Rs51b in FY10); this is below our expectation of Rs57b.
- Raised production target for FY11 to 17GW from 16GW earlier, indicating strong sales growth in FY11.
- Favorably placed in NTPC bulk tender.
- Capex target maintained at Rs15-16b for FY11 and Rs14b for FY12. Capacity expected to go to 20 GW per annum from 15GW per annum now.
- Expects steady progress on JVs with states like Tamil Nadu, Gujarat, Maharashtra and MP. Expect orders from these JVs to flow in FY11-12.
- BHEL is in final stages of the formation of transmission JV with Toshiba which will focus on manufacturing 765KVA transformers, switchgears and GIS.
- BHEL expects orders for two sets of 700MW each under the Nuclear Power JV with Alstom by late FY11 or early FY12.
- Industry sector also growing well with large orders from captive power, gas and industrial segments.
Higher production guidance coupled with lower wage cost offers 5% upside to our FY11 earnings estimate
- Management has indicated that overall shop floor production will touch 17GW in FY11 as compared to 11GW in FY10. This will provide 4% upside to our FY11 revenue estimates.
- Higher sales, coupled with lower wage bill, can result in 5% upside to our FY11 earnings estimate (to Rs125 vs current estimate of Rs119). However, we are maintaining estimates as of now.
Power market to grow to 50GW per annum; BHEL will maintain over 50% market share
- To reach targeted power generation capacity base of 700GW by FY27, India needs to award 500GW of orders during next ten years, implying a market opportunity of nearly 50GW per annum for power equipment.
- With projected equipment manufacturing capacity of 38GW per annum by FY15 and growing concern on imports, Indian power equipment market will continue to be in short-supply. We believe BHEL will continue to enjoy over 50% market share, thereby providing growth visibility over the long term.
Valuation and view
- We expect BHEL to clock revenue CAGR of 22% and PAT CAGR of 24% over FY10-12E.
- BHEL has successfully countered the competitive threats posed by Chinese and Korean players. With environment in the power equipment industry turning favorable to domestic manufacturers, BHEL is well-placed to maintain its market share.
- With wage settlement already in place, we expect economies of scale to play out in next three years, boosting margins.
- In context of improved earnings visibility and strong industry tailwinds, BHEL is attractively valued. Our EPS estimates for BHEL stand at Rs119 for FY11 (up 24%) and Rs147 for FY12 (up 24%). Our price target stands at Rs2,935 (20x FY12E), an upside of 20% from current levels. Maintain Buy.
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