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EARNINGS REVIEW
Bharat Heavy Electricals (BHEL.BO)
Neutral Equity Research
In line with expectations: structural risks remain; maintain Neutral
What surprised us
BHEL reported 3QFY11 net income, adjusted for the accounting change of
Rs13,432 mn, mostly in-line with our and above Bloomberg consensus
estimates mainly on lower than expected raw material costs. Raw material
costs for the quarter came in at 56% of gross sales, lower than the average
59%-60% range seen over past few quarters. Order book at the end of the
quarter was at Rs1580bn, registering growth of 18% yoy. The company
made an accounting change this quarter to do a cost – revenue match on
completion of project trial operations.
What to do with the stock
The margin improvement of 150 bp for the quarter, amid increasing
commodity prices, was partly due to better cost management and partly
due to utilization of previously purchased inventory. However, margins
might come under pressure over the next few quarters as the impact of
rising raw material prices tends to come with a 4-5 month lag.
We remain Neutral on the stock on valuation though we continue to
foresee structural risks from increasing competition in the power
equipment space. We increase our FY11E-FY13E EPS by less than 1%
Rs110.28/120.28/131.38 to reflect 3Q results and consequently our 12-m TP
rises to Rs2,310 (from Rs2,291 earlier), based on 19.2X FY12E P/E. BHEL
currently trades at FY12EP/E of 18.4X, at a 23% premium to the median 2-
yr forward P/E for the global power equipment peer group. Key risks
include 1) Favorable regulatory changes such as import duties on
equipment 2) delay in new capacity addition from competition
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Bharat Heavy Electricals (BHEL.BO)
Neutral Equity Research
In line with expectations: structural risks remain; maintain Neutral
What surprised us
BHEL reported 3QFY11 net income, adjusted for the accounting change of
Rs13,432 mn, mostly in-line with our and above Bloomberg consensus
estimates mainly on lower than expected raw material costs. Raw material
costs for the quarter came in at 56% of gross sales, lower than the average
59%-60% range seen over past few quarters. Order book at the end of the
quarter was at Rs1580bn, registering growth of 18% yoy. The company
made an accounting change this quarter to do a cost – revenue match on
completion of project trial operations.
What to do with the stock
The margin improvement of 150 bp for the quarter, amid increasing
commodity prices, was partly due to better cost management and partly
due to utilization of previously purchased inventory. However, margins
might come under pressure over the next few quarters as the impact of
rising raw material prices tends to come with a 4-5 month lag.
We remain Neutral on the stock on valuation though we continue to
foresee structural risks from increasing competition in the power
equipment space. We increase our FY11E-FY13E EPS by less than 1%
Rs110.28/120.28/131.38 to reflect 3Q results and consequently our 12-m TP
rises to Rs2,310 (from Rs2,291 earlier), based on 19.2X FY12E P/E. BHEL
currently trades at FY12EP/E of 18.4X, at a 23% premium to the median 2-
yr forward P/E for the global power equipment peer group. Key risks
include 1) Favorable regulatory changes such as import duties on
equipment 2) delay in new capacity addition from competition
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