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BHEL – 3QFY2011 Result Update
Angel Broking maintains a Neutral view on BHEL.
BHEL’s 3QFY2011 results were ahead of our expectations, largely aided by
margin expansions at the EBIDTA and PAT levels. The numbers were positively
impacted by the one-off adjustment in turnover, PBT and PAT arising on account
of modifications in the method of calculating the percentage completion for
revenue recognition. Inclusive of the above adjustments, BHEL’s revenue grew by
24.8% yoy, while PAT increased by 30.8% yoy. We maintain our Neutral view on
the stock.
Strong growth with impressive margins: For 3QFY2011, the company’s revenue
posted a robust growth of 24.8% yoy to `9,023cr. EBITDA also increased by
32.7% yoy to `2,072cr on the back of the 136bp yoy improvement in margin to
23%. The margin improvement was mainly facilitated by the sharp decline in raw
material costs, which contracted to 55.8% (58.8%) yoy. Staff cost also fell to
14.9% of revenues compared to 17% during the corresponding period of the
previous year. Other expenses rose sharply by 59% yoy to `793cr (`499cr) mainly
on account of the `100cr provisioning for liquidated damages. Strong growth
coupled with higher margins led to the 30.8% yoy growth in PAT to `1,403cr.
Excluding the one-off adjustments, the growth in turnover and PAT stood at 18.7%
and 25.2%, respectively.
Outlook and valuation: The Indian power equipment industry is undergoing
structural changes post the increasing preference for fuel-efficient and
supercritical technologies. Given the growth prospects in the domestic power
sector, few Indian companies have set up or have initiated the process of setting
up local manufacturing facilities in collaboration with leading international
players. As competition intensifies from both the domestic as well as overseas
players, we do not expect BHEL to maintain its existing profitability margins and
increase its current market share in the long term. At the CMP of `2,218, the
stock is quoting at 19.2x FY2011E EPS and at 15.7x FY2012E EPS. Given the
long-term structural concerns, we maintain our Neutral view on the stock.
One-off adjustment positively impacts turnover and profit
As per the revenue recognition practice followed by the company, ~97.5% of the
realisable contract value is recognised as revenues during the execution period
and the balance 2.5% is recognised only after completion of the trial operations.
BHEL also follows the practice of providing for warranties @2.5% of the contract
value on completion of the trial operations. The above two practices entail
simultaneous recognition of residual revenues @2.5% of the contract value and
creation of corresponding warranty obligations @2.5% of the contract value only
after the trial operations are over.
During the past few quarters, it was observed that in few of the contracts,
aggregate revenues recognised during the execution period deviated from the
benchmark 97.5% on account of the variations in the total estimated cost and the
actual cost incurred. These deviations had a consequential impact on the
percentage of revenues that were recognised post completion of the trial
operations leading to a mismatch (ranging from 1% to 5%) vis-à-vis the
provisioning for warranties @2.5% of the contract revenue.
Management informed that the deviations of the past are insignificant to materially
impact the recognition policy and hence have not been adjusted. However, with
increasing ticket size of contracts, the aggregate of the deviations has the potential
to materially impact the revenue recognition vis-à-vis the provisioning for
warranties, and hence the method of calculating the percentage completion has
been modified to remove the above mismatch. This modification would ensure
compliance with the existing policy where only 2.5% of the contract revenue is
recognised on completion of the trial operations with corresponding provision for
warranties. Management informed that the revised methodology would be
applied for future reporting periods as well.
The above modification, which incidentally relates to the ongoing contracts of the
current and earlier periods, resulted in a one-off net increase in turnover by
`444cr during 3QFY2011. On the profitability front, PBT and PAT increased to the
extent of `88cr and `60cr, respectively. Inclusive of the above adjustments, BHEL’s
revenue grew by 24.8% yoy, while PAT increased by 30.8% yoy. Excluding the
above adjustments, the growth in turnover and PAT was at 18.7% and 25.2%,
respectively.
Operational improvements drive down raw material cost:
Various operational improvement initiatives undertaken in the past such as design
to cost and focus on lean manufacturing have enabled the company to lower its
raw material consumption. Also, better buying practices and the long-term
contracts with the material suppliers have helped the company source its materials
at competitive rates. We also note that ~50% of the contracts have a built in price
variation clause with a pass-through mechanism. For the remainder of the
contracts, BHEL would continue to focus on optimising the raw material
consumption. For FY2011, management expects the raw material cost to hold
steady at 59-60% of sales similar to FY2010 levels.
Consistent performance by power segment: For 3QFY2011, the power division
continued to report strong growth of 27.6% yoy to `7,282cr (`5,709cr), while the
industry division reported steady growth of 18.9% yoy to `2,143cr (`1,802cr).
However, EBIT margin of the power division declined marginally by 50bp to
22.4%. For the cumulative period up to 9MFY2011, margins improved by 60bp
yoy to 21.3%. The industry division reported a 130bp dip in margin to 21.2%
during the quarter.
Steady margins coupled with strong revenue growth enabled the power division to
report 24.7% yoy growth in EBIT to `1,632cr, while the industry division reported
moderate growth of 12.1% yoy to `454cr due to the dip in margins. The
company’s long-term strategy would be to maintain a balanced order backlog and
revenue portfolio spread across the power and industry divisions in the ratio of
70:30.
Order inflow: During 3QFY2011, the company’s order inflow fell by 21% yoy to
`12,592cr. The power division accounted for `7,877cr, while the industrial and
export divisions accounted for `2,735cr and `1,980cr, respectively. Order backlog
at the end of 3QFY2011 stood at ~`1, 57,611cr. Order inflow during 9MFY2011
aggregated to `36,524cr and remained nearly flat compared to corresponding
period of the previous year. Management has maintained its guidance of annual
order inflow to aggregate to ~`60,000cr during FY2011.
Notable orders received during the quarter:
5X270MW Nashik Phase II (India bulls Power) `2,875cr
5X270MW Amravati Phase II (Elena Power) `2,883cr
1X600MW Rayalaseema Unit No 6 (APGENCO) `2,875cr
672MW Marib Phase II Gas Turbine `1,976cr
Investment Arguments
Dominant player in the domestic power equipment market: BHEL is the largest
supplier of power equipment in India with a wide product portfolio consisting of
boilers, gas turbines, fabric filters, steam generators and switch gears, among
others. The company primarily caters to power-generating companies by offering
steam turbines, generators, boilers and matching auxiliaries of up to 800MW
rating, including super-critical sets of 660/800MW. The company has facilities that
can go up to 1,000MW of unit size. While competition is intensifying due to high
prospects in the power sector, BHEL continues to be strong, especially in the boiler
turbine generator (BTG) category, which forms a key part of the power plant. As a
fully integrated power equipment player, BHEL enjoys a strong domestic presence
in the power equipment market.
Well-positioned for future: The Indian power sector is likely to witness massive
capacity additions of ~150,000MW over the next decade. BHEL, being a
dominant domestic player, is expected to be the major beneficiary of the unfolding
opportunities in the power equipment space. Furthermore, the company is
augmenting its manufacturing capacity from the current 15GW to 20GW, after
having introduced new ratings of 150MW, 270MW, 525MW and 600MW in the
sub-critical segment and 660MW and 800MW in the super-critical segment.
Strategic tie-ups to enhance competitive edge: BHEL is taking various initiatives,
including strategic alliances through joint ventures (JV), in the supercritical
technology and technology-sourcing domains. To pursue inorganic growth, tie-ups
are being identified in the areas of: a) transmission, with a focus on 765kV and
1,200kV segments (JV with Toshiba for transmission products); b) photovoltaics
(PV), with a focus on manufacturing silicon wafers, solar cells, modules and setting
up a greenfield PV project, and c) nuclear, with a focus on building special nuclear
reactors for which GE-Hitachi has signed an agreement with NPCIL and BHEL.
Outlook and valuation
The Indian power equipment industry is undergoing structural changes post the
increasing preference for fuel-efficient and supercritical technologies. Given the
growth prospects in the domestic power sector, few Indian companies have set up
or have initiated the process of setting up local manufacturing facilities in
collaboration with leading international players. As competition intensifies from
both domestic as well as overseas players, we do not expect BHEL to increase its
current market share in the long term. At the CMP of `2,218, the stock is quoting
at 19.2x FY2011E EPS and at 15.7x FY2012E EPS. Given the long-term structural
concerns, we maintain our Neutral view on the stock.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
BHEL – 3QFY2011 Result Update
Angel Broking maintains a Neutral view on BHEL.
BHEL’s 3QFY2011 results were ahead of our expectations, largely aided by
margin expansions at the EBIDTA and PAT levels. The numbers were positively
impacted by the one-off adjustment in turnover, PBT and PAT arising on account
of modifications in the method of calculating the percentage completion for
revenue recognition. Inclusive of the above adjustments, BHEL’s revenue grew by
24.8% yoy, while PAT increased by 30.8% yoy. We maintain our Neutral view on
the stock.
Strong growth with impressive margins: For 3QFY2011, the company’s revenue
posted a robust growth of 24.8% yoy to `9,023cr. EBITDA also increased by
32.7% yoy to `2,072cr on the back of the 136bp yoy improvement in margin to
23%. The margin improvement was mainly facilitated by the sharp decline in raw
material costs, which contracted to 55.8% (58.8%) yoy. Staff cost also fell to
14.9% of revenues compared to 17% during the corresponding period of the
previous year. Other expenses rose sharply by 59% yoy to `793cr (`499cr) mainly
on account of the `100cr provisioning for liquidated damages. Strong growth
coupled with higher margins led to the 30.8% yoy growth in PAT to `1,403cr.
Excluding the one-off adjustments, the growth in turnover and PAT stood at 18.7%
and 25.2%, respectively.
Outlook and valuation: The Indian power equipment industry is undergoing
structural changes post the increasing preference for fuel-efficient and
supercritical technologies. Given the growth prospects in the domestic power
sector, few Indian companies have set up or have initiated the process of setting
up local manufacturing facilities in collaboration with leading international
players. As competition intensifies from both the domestic as well as overseas
players, we do not expect BHEL to maintain its existing profitability margins and
increase its current market share in the long term. At the CMP of `2,218, the
stock is quoting at 19.2x FY2011E EPS and at 15.7x FY2012E EPS. Given the
long-term structural concerns, we maintain our Neutral view on the stock.
One-off adjustment positively impacts turnover and profit
As per the revenue recognition practice followed by the company, ~97.5% of the
realisable contract value is recognised as revenues during the execution period
and the balance 2.5% is recognised only after completion of the trial operations.
BHEL also follows the practice of providing for warranties @2.5% of the contract
value on completion of the trial operations. The above two practices entail
simultaneous recognition of residual revenues @2.5% of the contract value and
creation of corresponding warranty obligations @2.5% of the contract value only
after the trial operations are over.
During the past few quarters, it was observed that in few of the contracts,
aggregate revenues recognised during the execution period deviated from the
benchmark 97.5% on account of the variations in the total estimated cost and the
actual cost incurred. These deviations had a consequential impact on the
percentage of revenues that were recognised post completion of the trial
operations leading to a mismatch (ranging from 1% to 5%) vis-à-vis the
provisioning for warranties @2.5% of the contract revenue.
Management informed that the deviations of the past are insignificant to materially
impact the recognition policy and hence have not been adjusted. However, with
increasing ticket size of contracts, the aggregate of the deviations has the potential
to materially impact the revenue recognition vis-à-vis the provisioning for
warranties, and hence the method of calculating the percentage completion has
been modified to remove the above mismatch. This modification would ensure
compliance with the existing policy where only 2.5% of the contract revenue is
recognised on completion of the trial operations with corresponding provision for
warranties. Management informed that the revised methodology would be
applied for future reporting periods as well.
The above modification, which incidentally relates to the ongoing contracts of the
current and earlier periods, resulted in a one-off net increase in turnover by
`444cr during 3QFY2011. On the profitability front, PBT and PAT increased to the
extent of `88cr and `60cr, respectively. Inclusive of the above adjustments, BHEL’s
revenue grew by 24.8% yoy, while PAT increased by 30.8% yoy. Excluding the
above adjustments, the growth in turnover and PAT was at 18.7% and 25.2%,
respectively.
Operational improvements drive down raw material cost:
Various operational improvement initiatives undertaken in the past such as design
to cost and focus on lean manufacturing have enabled the company to lower its
raw material consumption. Also, better buying practices and the long-term
contracts with the material suppliers have helped the company source its materials
at competitive rates. We also note that ~50% of the contracts have a built in price
variation clause with a pass-through mechanism. For the remainder of the
contracts, BHEL would continue to focus on optimising the raw material
consumption. For FY2011, management expects the raw material cost to hold
steady at 59-60% of sales similar to FY2010 levels.
Consistent performance by power segment: For 3QFY2011, the power division
continued to report strong growth of 27.6% yoy to `7,282cr (`5,709cr), while the
industry division reported steady growth of 18.9% yoy to `2,143cr (`1,802cr).
However, EBIT margin of the power division declined marginally by 50bp to
22.4%. For the cumulative period up to 9MFY2011, margins improved by 60bp
yoy to 21.3%. The industry division reported a 130bp dip in margin to 21.2%
during the quarter.
Steady margins coupled with strong revenue growth enabled the power division to
report 24.7% yoy growth in EBIT to `1,632cr, while the industry division reported
moderate growth of 12.1% yoy to `454cr due to the dip in margins. The
company’s long-term strategy would be to maintain a balanced order backlog and
revenue portfolio spread across the power and industry divisions in the ratio of
70:30.
Order inflow: During 3QFY2011, the company’s order inflow fell by 21% yoy to
`12,592cr. The power division accounted for `7,877cr, while the industrial and
export divisions accounted for `2,735cr and `1,980cr, respectively. Order backlog
at the end of 3QFY2011 stood at ~`1, 57,611cr. Order inflow during 9MFY2011
aggregated to `36,524cr and remained nearly flat compared to corresponding
period of the previous year. Management has maintained its guidance of annual
order inflow to aggregate to ~`60,000cr during FY2011.
Notable orders received during the quarter:
5X270MW Nashik Phase II (India bulls Power) `2,875cr
5X270MW Amravati Phase II (Elena Power) `2,883cr
1X600MW Rayalaseema Unit No 6 (APGENCO) `2,875cr
672MW Marib Phase II Gas Turbine `1,976cr
Investment Arguments
Dominant player in the domestic power equipment market: BHEL is the largest
supplier of power equipment in India with a wide product portfolio consisting of
boilers, gas turbines, fabric filters, steam generators and switch gears, among
others. The company primarily caters to power-generating companies by offering
steam turbines, generators, boilers and matching auxiliaries of up to 800MW
rating, including super-critical sets of 660/800MW. The company has facilities that
can go up to 1,000MW of unit size. While competition is intensifying due to high
prospects in the power sector, BHEL continues to be strong, especially in the boiler
turbine generator (BTG) category, which forms a key part of the power plant. As a
fully integrated power equipment player, BHEL enjoys a strong domestic presence
in the power equipment market.
Well-positioned for future: The Indian power sector is likely to witness massive
capacity additions of ~150,000MW over the next decade. BHEL, being a
dominant domestic player, is expected to be the major beneficiary of the unfolding
opportunities in the power equipment space. Furthermore, the company is
augmenting its manufacturing capacity from the current 15GW to 20GW, after
having introduced new ratings of 150MW, 270MW, 525MW and 600MW in the
sub-critical segment and 660MW and 800MW in the super-critical segment.
Strategic tie-ups to enhance competitive edge: BHEL is taking various initiatives,
including strategic alliances through joint ventures (JV), in the supercritical
technology and technology-sourcing domains. To pursue inorganic growth, tie-ups
are being identified in the areas of: a) transmission, with a focus on 765kV and
1,200kV segments (JV with Toshiba for transmission products); b) photovoltaics
(PV), with a focus on manufacturing silicon wafers, solar cells, modules and setting
up a greenfield PV project, and c) nuclear, with a focus on building special nuclear
reactors for which GE-Hitachi has signed an agreement with NPCIL and BHEL.
Outlook and valuation
The Indian power equipment industry is undergoing structural changes post the
increasing preference for fuel-efficient and supercritical technologies. Given the
growth prospects in the domestic power sector, few Indian companies have set up
or have initiated the process of setting up local manufacturing facilities in
collaboration with leading international players. As competition intensifies from
both domestic as well as overseas players, we do not expect BHEL to increase its
current market share in the long term. At the CMP of `2,218, the stock is quoting
at 19.2x FY2011E EPS and at 15.7x FY2012E EPS. Given the long-term structural
concerns, we maintain our Neutral view on the stock.
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