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3QFY11 earnings above estimates: BHEL reported a robust 3QFY11 financial performance, ahead of estimates.
Reported revenues were Rs90b (up 25% YoY), better than our estimate of Rs88b (up 23% YoY). Reported EBITDA
margins were 23%, up 140bp YoY (against our estimate of 20.4%). Reported net profit was Rs14b (up 31% YoY),
better than our estimate of Rs12b (up 14% YoY). 9mFY11 revenue and PAT growth was 23% and 33% YoY respectively.
Change in accounting mechanism leads to revenue, EBITDA adjustment of Rs4.4b, Rs880m: In 3QFY11
BHEL re-aligned its mismatch in booking revenue and costs, which led to an increase of Rs4.4b in revenue and
Rs880m in EBITDA. If we exclude this, revenue was Rs86b, up 18.7% YoY and adjusted PAT was Rs13.4b, up 21%
YoY.
Raw material cost falls 100bp YoY, EBITDA margin up 140bp at 23%: In 3QFY11 raw material costs were 54.4%
(down 116bp YoY) and other expenditure was up 194bp due to the creation of an LD provision of Rs1b. Staff costs
were down 200bp YoY at 15.2% to sales. The management expects staff costs to be about Rs56b in FY11. Staff cost
during 9mFY11 was Rs39b, implying likely staff cost of Rs17b in 4QFY11.
Order intake guidance maintained: BHEL maintained its guidance of order-flow of Rs600b in FY09, implying
4QFY11 inflow of Rs23b. Given the pipeline of projects, we expect BHEL to meet its guidance.
Valuation and view: In the context of improved earnings visibility and strong industry tailwinds, BHEL is attractively
valued. Our EPS estimates are Rs119.2 (up 24% YoY) for FY11 and Rs146.4 (up 24% YoY) for FY12. Our price
target is Rs2,927 (20x FY12E), an upside of 32% from current levels. Maintain Buy.
BHEL: 3QFY11 results ahead of estimates, PAT up 31% YoY, material costs
fall; maintain Buy
BHEL posted robust financial performance, ahead of estimates. 3QFY11 revenue
was Rs90b (up 25% YoY), better than our estimate of Rs88b (up 23% YoY). EBITDA
margins were 23%, up 140bp YoY (above our estimate of 23%). Net profit was Rs14b
(up 31% YoY), better than our estimate of Rs12b (up 14% YoY). In the 9mFY11
revenue and PAT grew 23% and 33% YoY respectively.
In 3QFY11, BHEL re-aligned its mismatch in booking revenue and costs, which led to
an increase of Rs4.4b in revenue and Rs880m in EBITDA. If we exclude this, revenue
was Rs86b, up 18.7% YoY and adjusted PAT was up 21% YoY at Rs13.5b.
Order backlog at the end of 3QFY11 was Rs1,580b and BTB ratio was 4.2x TTM
revenue. In 3QFY11 order intake was Rs128b, down 18% YoY. Intake in 9mFY11
was Rs371b, flat YoY. Implied order intake in 4QFY11 is Rs228b according to the
management's FY11 intake guidance of Rs600b. The power and industry segment
revenues improved by 28% and 19% YoY respectively. Power segment EBIT margins
were 22.4% (down 51bp YoY) and industry segment margins were 21.2% (down
129bp YoY).
Revenue growth buoyant, capacity to expand to 20GW, to ease execution
challenges
For 3QFY11, revenues were Rs90b (up 25% YoY), above our estimate of Rs88b (up
23% YoY). The power segment's revenue grew 28%, and the industrial segment's
revenue grew 19%. Adjusted for a Rs4.4b increase in revenue due to a change in
accounting policy, revenue was Rs85b, up 19% YoY. 9mFY11 revenues were Rs239b
up 23% YoY
The management indicated in the past that overall shop floor production would touch
17GW in FY11 against 11GW in FY10. This reflects BHEL's enhanced ability to
handle increased tonnage of steel at its plant, which includes castings, steel pipes and
valves due to enhanced capacity to 15GW.
BHEL is on track to expand capacity to 20GW a year by FY12. We believe, with
expanded capacity, the company will be able to grow production at an accelerated
pace in FY13-14.
Power drives performance, industrial segment a long term focus area
3QFY11 power segment revenue was Rs73b (up 28% YoY) and revenue from the
industrial segment was Rs22b (up 19% YoY). The power division contributed 77% to
total revenue and the industrial division contributed 23%. EBIT margins for the power
division dropped 51bp YoY to 22.4% and for the industry segment they were 21.2%,
down 129bp YoY.
In the industry segment, BHEL entered into railways (propulsion systems for
locomotives of 700HP range with Alstom) and defense (naval guns). These will keep
long term drivers for the industry segment intact as the management foresees consistent
revenue growth of 20-25% for this segment in four-five years with new segments
driving revenue growth.
RM cost up 235bp YoY, adjusted EBITDA margin up 63bp at 19.2%
Raw material cost falls, EBITDA margins expand
In 3QFY11 raw material costs were 54.4% (down 116bp YoY) and other expenditure
was up 194bp due to provisions of Rs1b according to the management.
Staff costs were down 200bp YoY and were 15.2% of sales. The management has
guided for overall staff costs of Rs56b in FY11 and 9mFY11 staff costs were Rs39b,
implying 4QFY11 staff costs of Rs17b.
Order intake fall 18% YoY, FY11 order intake expected to increase 6%
BHEL's order book as at December 2010 was Rs1,548b (up 18% YoY, and up 2%
QoQ).
In 3QFY11 BHEL reported order intake of Rs126b, down 18% YoY. The boiler order
awards, part of the bulk tendering by NTPC and DVC for 11 sets of 660MW plants is
under arbitration due to a stay order brought in by one of the bidders Gammon-Ansaldo.
The consortium claims Ansaldo was reportedly disqualified because of a technical
reason that it did not design the 'evaporator' of the boiler that was offered as
the reference operating plant in the tender.
Once this process is complete, we expect final awards. Bharat Forge (will get five
units), BHEL (four units) and Toshiba (two units) have been short listed. We do
not expect Ansaldo to get a favorable response from the Court. In the turbinegenerator
(TG) package of the same tender earlier, L&T, which had been
disqualified had filed a Court case, but without a favorable ruling. The court will now
announce its hearing on the matter on 3 February 2011. The management expects
price bids for the boiler package to open on 4 February 2011, and final awards by
March 2011.
Takeaways from 3QFY11 results conference call
The management sees power equipment demand staying strong in future. BHEL does
not see a serious threat from competition and expects to maintain market share.
The accounting adjustment in 3QFY11 pertained to standardization of liquidated damages
at 2.5% of the contract value for all projects and hence is a one-off.
PBT impact of Rs880m from Rs4.4b of revenue (due to change in the accounting
method) translates into Rs3.56b of operating costs. Most of this (~50%) is adjusted
towards material costs.
The management is confident of achieving FY11 inflows of Rs600b, translating into
4QFY11 inflows of Rs228b. We expect FY12 inflows to exceed Rs600b. The company
expects the bulk tender of 9x 800MW from NTPC to come through in 2QFY12.
Besides the JV with Karanatak State Electricity Board (KSEB) most of the other JVs
with Andhra (AP), TN (Tamil Nadu) and MP (Madhya Pradesh) will award EPC
contracts in FY12.
Material costs, which dropped by 116bp YoY during 3QFY11, were the result of better
sourcing of and integration of processes within the shop floor. Material inventory of
six months is maintained by BHEL.
BHEL intends to make critical parts like CRGO steel in collaboration with SAIL and
expand its vendor base going forward to ease bottlenecks in its execution.
The company expects an addition of 4,000 employees in FY11 and FY12 each. The
current employee strength is 47,000. BHEL expects staff costs as a percentage of
sales to fall from 15.5% currently as a revenue ramp up creates more leverage in the
system.
BHEL firmed up plans for the formation of an NBFC that will finance equipment
purchase for its clients to better tackle competition from Chinese vendors.
BHEL formed a JV with Alstom to make turbines for nuclear powered plants and will
bid for NPCIL tenders in FY12.
The company's net current assets were Rs15b and cash on books was Rs80b.
Power market to grow to 50GW a year, BHEL to maintain 50% share
To reach a targeted power generation capacity base of 700GW by FY27, India needs to
award 500GW of orders during the next 10 years, implying a market opportunity of nearly
50GW a year for power equipment in the next 5-7 years. With projected equipment
manufacturing capacity of 38GW a year by FY15 and growing concern over imports, the
Indian power equipment market will be in short-supply. We believe BHEL will continue to
enjoy over 50% market share, providing long term growth visibility.
Valuation and view
BHEL is expected to maintain revenue and PAT CAGR of 22% and 24% respectively
over FY10-12.
BHEL has countered the competitive threats from 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 a wage settlement in place, we expect economies of scale to play out in three
years, boosting margins.
In the context of improved earnings visibility and strong industry tailwinds, BHEL is
attractively valued. Our EPS estimates for BHEL are Rs119.2 (up 24% YoY) for
FY11 and Rs146.4 (up 24% YoY) for FY12. Our price target is Rs2,927 (20x FY12E),
an upside of 32% from current levels. Maintain Buy.
Company description
BHEL is India's dominant producer of power and industrial
machinery and a leading EPC company, established in the
late 1950s as the government's wholly-owned subsidiary.
After divestment, the government has an equity stake of
67.7%. The company has 14 manufacturing divisions, eight
service centers, four power sector regional centers besides
project sites all over India and abroad. It has an annual
installed capacity of 6,000MW. It formed a tie-up with
Alstom and an alliance with Siemens to make super-critical
800MW boilers and turbines respectively.
Key investment arguments
Order backlog at the end of 2QFY11 was Rs1,540b, a
book-to-bill ratio of 4.3x TTM providing the best
revenue visibility in our engineering universe
Its earnings and revenue CAGR was 22% and 24%
respectively and adjusted EBITDA margin expansion
is expected to be 250bp over FY10-12 at 22.1%.
After capacity expansion to 20GW by 2012, BHEL's
capacity will be at par with its competitors, giving BHEL
sizeable muscle to compete, execute and deliver on time.
Key investment risks
The key challenge is to meet execution deadlines and
improve cost efficiencies. There is stiff competition
from Chinese, Korean and private Indian players
(L&T).
Recent developments
NTPC opened price-bids for a turbine-generator (TG)
package of its Rs250b bulk tender to set up 11 units
(including two units of DVC) of 660MW super-critical
power projects on 8 October 2010. Based on 'read out'
prices (prices quoted by bidders), the Alstom-Bharat
Forge joint venture is the lowest bidder (Rs13m/MW).
The company will get two projects (a maximum of four
or five units of 660MW each). BHEL is the second
lowest bidder (8% higher than the Alstom-Bharat Forge
venture) and will get two projects (four or five units of
660MW each). BHEL will have to match the L1 price.
Valuation and view
In the context of improved earnings visibility and strong
industry tailwinds, BHEL is attractively valued. Our EPS
estimates for BHEL are Rs119.2 (up 24% YoY) for
FY11 and Rs146.4 (up 24% YoY) for FY12. Our price
target is Rs2,927 (20x FY12E), an upside of 32% from
current levels. Maintain Buy.
Sector view
We maintain a positive view on the sector.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
3QFY11 earnings above estimates: BHEL reported a robust 3QFY11 financial performance, ahead of estimates.
Reported revenues were Rs90b (up 25% YoY), better than our estimate of Rs88b (up 23% YoY). Reported EBITDA
margins were 23%, up 140bp YoY (against our estimate of 20.4%). Reported net profit was Rs14b (up 31% YoY),
better than our estimate of Rs12b (up 14% YoY). 9mFY11 revenue and PAT growth was 23% and 33% YoY respectively.
Change in accounting mechanism leads to revenue, EBITDA adjustment of Rs4.4b, Rs880m: In 3QFY11
BHEL re-aligned its mismatch in booking revenue and costs, which led to an increase of Rs4.4b in revenue and
Rs880m in EBITDA. If we exclude this, revenue was Rs86b, up 18.7% YoY and adjusted PAT was Rs13.4b, up 21%
YoY.
Raw material cost falls 100bp YoY, EBITDA margin up 140bp at 23%: In 3QFY11 raw material costs were 54.4%
(down 116bp YoY) and other expenditure was up 194bp due to the creation of an LD provision of Rs1b. Staff costs
were down 200bp YoY at 15.2% to sales. The management expects staff costs to be about Rs56b in FY11. Staff cost
during 9mFY11 was Rs39b, implying likely staff cost of Rs17b in 4QFY11.
Order intake guidance maintained: BHEL maintained its guidance of order-flow of Rs600b in FY09, implying
4QFY11 inflow of Rs23b. Given the pipeline of projects, we expect BHEL to meet its guidance.
Valuation and view: In the context of improved earnings visibility and strong industry tailwinds, BHEL is attractively
valued. Our EPS estimates are Rs119.2 (up 24% YoY) for FY11 and Rs146.4 (up 24% YoY) for FY12. Our price
target is Rs2,927 (20x FY12E), an upside of 32% from current levels. Maintain Buy.
BHEL: 3QFY11 results ahead of estimates, PAT up 31% YoY, material costs
fall; maintain Buy
BHEL posted robust financial performance, ahead of estimates. 3QFY11 revenue
was Rs90b (up 25% YoY), better than our estimate of Rs88b (up 23% YoY). EBITDA
margins were 23%, up 140bp YoY (above our estimate of 23%). Net profit was Rs14b
(up 31% YoY), better than our estimate of Rs12b (up 14% YoY). In the 9mFY11
revenue and PAT grew 23% and 33% YoY respectively.
In 3QFY11, BHEL re-aligned its mismatch in booking revenue and costs, which led to
an increase of Rs4.4b in revenue and Rs880m in EBITDA. If we exclude this, revenue
was Rs86b, up 18.7% YoY and adjusted PAT was up 21% YoY at Rs13.5b.
Order backlog at the end of 3QFY11 was Rs1,580b and BTB ratio was 4.2x TTM
revenue. In 3QFY11 order intake was Rs128b, down 18% YoY. Intake in 9mFY11
was Rs371b, flat YoY. Implied order intake in 4QFY11 is Rs228b according to the
management's FY11 intake guidance of Rs600b. The power and industry segment
revenues improved by 28% and 19% YoY respectively. Power segment EBIT margins
were 22.4% (down 51bp YoY) and industry segment margins were 21.2% (down
129bp YoY).
Revenue growth buoyant, capacity to expand to 20GW, to ease execution
challenges
For 3QFY11, revenues were Rs90b (up 25% YoY), above our estimate of Rs88b (up
23% YoY). The power segment's revenue grew 28%, and the industrial segment's
revenue grew 19%. Adjusted for a Rs4.4b increase in revenue due to a change in
accounting policy, revenue was Rs85b, up 19% YoY. 9mFY11 revenues were Rs239b
up 23% YoY
The management indicated in the past that overall shop floor production would touch
17GW in FY11 against 11GW in FY10. This reflects BHEL's enhanced ability to
handle increased tonnage of steel at its plant, which includes castings, steel pipes and
valves due to enhanced capacity to 15GW.
BHEL is on track to expand capacity to 20GW a year by FY12. We believe, with
expanded capacity, the company will be able to grow production at an accelerated
pace in FY13-14.
Power drives performance, industrial segment a long term focus area
3QFY11 power segment revenue was Rs73b (up 28% YoY) and revenue from the
industrial segment was Rs22b (up 19% YoY). The power division contributed 77% to
total revenue and the industrial division contributed 23%. EBIT margins for the power
division dropped 51bp YoY to 22.4% and for the industry segment they were 21.2%,
down 129bp YoY.
In the industry segment, BHEL entered into railways (propulsion systems for
locomotives of 700HP range with Alstom) and defense (naval guns). These will keep
long term drivers for the industry segment intact as the management foresees consistent
revenue growth of 20-25% for this segment in four-five years with new segments
driving revenue growth.
RM cost up 235bp YoY, adjusted EBITDA margin up 63bp at 19.2%
Raw material cost falls, EBITDA margins expand
In 3QFY11 raw material costs were 54.4% (down 116bp YoY) and other expenditure
was up 194bp due to provisions of Rs1b according to the management.
Staff costs were down 200bp YoY and were 15.2% of sales. The management has
guided for overall staff costs of Rs56b in FY11 and 9mFY11 staff costs were Rs39b,
implying 4QFY11 staff costs of Rs17b.
Order intake fall 18% YoY, FY11 order intake expected to increase 6%
BHEL's order book as at December 2010 was Rs1,548b (up 18% YoY, and up 2%
QoQ).
In 3QFY11 BHEL reported order intake of Rs126b, down 18% YoY. The boiler order
awards, part of the bulk tendering by NTPC and DVC for 11 sets of 660MW plants is
under arbitration due to a stay order brought in by one of the bidders Gammon-Ansaldo.
The consortium claims Ansaldo was reportedly disqualified because of a technical
reason that it did not design the 'evaporator' of the boiler that was offered as
the reference operating plant in the tender.
Once this process is complete, we expect final awards. Bharat Forge (will get five
units), BHEL (four units) and Toshiba (two units) have been short listed. We do
not expect Ansaldo to get a favorable response from the Court. In the turbinegenerator
(TG) package of the same tender earlier, L&T, which had been
disqualified had filed a Court case, but without a favorable ruling. The court will now
announce its hearing on the matter on 3 February 2011. The management expects
price bids for the boiler package to open on 4 February 2011, and final awards by
March 2011.
Takeaways from 3QFY11 results conference call
The management sees power equipment demand staying strong in future. BHEL does
not see a serious threat from competition and expects to maintain market share.
The accounting adjustment in 3QFY11 pertained to standardization of liquidated damages
at 2.5% of the contract value for all projects and hence is a one-off.
PBT impact of Rs880m from Rs4.4b of revenue (due to change in the accounting
method) translates into Rs3.56b of operating costs. Most of this (~50%) is adjusted
towards material costs.
The management is confident of achieving FY11 inflows of Rs600b, translating into
4QFY11 inflows of Rs228b. We expect FY12 inflows to exceed Rs600b. The company
expects the bulk tender of 9x 800MW from NTPC to come through in 2QFY12.
Besides the JV with Karanatak State Electricity Board (KSEB) most of the other JVs
with Andhra (AP), TN (Tamil Nadu) and MP (Madhya Pradesh) will award EPC
contracts in FY12.
Material costs, which dropped by 116bp YoY during 3QFY11, were the result of better
sourcing of and integration of processes within the shop floor. Material inventory of
six months is maintained by BHEL.
BHEL intends to make critical parts like CRGO steel in collaboration with SAIL and
expand its vendor base going forward to ease bottlenecks in its execution.
The company expects an addition of 4,000 employees in FY11 and FY12 each. The
current employee strength is 47,000. BHEL expects staff costs as a percentage of
sales to fall from 15.5% currently as a revenue ramp up creates more leverage in the
system.
BHEL firmed up plans for the formation of an NBFC that will finance equipment
purchase for its clients to better tackle competition from Chinese vendors.
BHEL formed a JV with Alstom to make turbines for nuclear powered plants and will
bid for NPCIL tenders in FY12.
The company's net current assets were Rs15b and cash on books was Rs80b.
Power market to grow to 50GW a year, BHEL to maintain 50% share
To reach a targeted power generation capacity base of 700GW by FY27, India needs to
award 500GW of orders during the next 10 years, implying a market opportunity of nearly
50GW a year for power equipment in the next 5-7 years. With projected equipment
manufacturing capacity of 38GW a year by FY15 and growing concern over imports, the
Indian power equipment market will be in short-supply. We believe BHEL will continue to
enjoy over 50% market share, providing long term growth visibility.
Valuation and view
BHEL is expected to maintain revenue and PAT CAGR of 22% and 24% respectively
over FY10-12.
BHEL has countered the competitive threats from 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 a wage settlement in place, we expect economies of scale to play out in three
years, boosting margins.
In the context of improved earnings visibility and strong industry tailwinds, BHEL is
attractively valued. Our EPS estimates for BHEL are Rs119.2 (up 24% YoY) for
FY11 and Rs146.4 (up 24% YoY) for FY12. Our price target is Rs2,927 (20x FY12E),
an upside of 32% from current levels. Maintain Buy.
Company description
BHEL is India's dominant producer of power and industrial
machinery and a leading EPC company, established in the
late 1950s as the government's wholly-owned subsidiary.
After divestment, the government has an equity stake of
67.7%. The company has 14 manufacturing divisions, eight
service centers, four power sector regional centers besides
project sites all over India and abroad. It has an annual
installed capacity of 6,000MW. It formed a tie-up with
Alstom and an alliance with Siemens to make super-critical
800MW boilers and turbines respectively.
Key investment arguments
Order backlog at the end of 2QFY11 was Rs1,540b, a
book-to-bill ratio of 4.3x TTM providing the best
revenue visibility in our engineering universe
Its earnings and revenue CAGR was 22% and 24%
respectively and adjusted EBITDA margin expansion
is expected to be 250bp over FY10-12 at 22.1%.
After capacity expansion to 20GW by 2012, BHEL's
capacity will be at par with its competitors, giving BHEL
sizeable muscle to compete, execute and deliver on time.
Key investment risks
The key challenge is to meet execution deadlines and
improve cost efficiencies. There is stiff competition
from Chinese, Korean and private Indian players
(L&T).
Recent developments
NTPC opened price-bids for a turbine-generator (TG)
package of its Rs250b bulk tender to set up 11 units
(including two units of DVC) of 660MW super-critical
power projects on 8 October 2010. Based on 'read out'
prices (prices quoted by bidders), the Alstom-Bharat
Forge joint venture is the lowest bidder (Rs13m/MW).
The company will get two projects (a maximum of four
or five units of 660MW each). BHEL is the second
lowest bidder (8% higher than the Alstom-Bharat Forge
venture) and will get two projects (four or five units of
660MW each). BHEL will have to match the L1 price.
Valuation and view
In the context of improved earnings visibility and strong
industry tailwinds, BHEL is attractively valued. Our EPS
estimates for BHEL are Rs119.2 (up 24% YoY) for
FY11 and Rs146.4 (up 24% YoY) for FY12. Our price
target is Rs2,927 (20x FY12E), an upside of 32% from
current levels. Maintain Buy.
Sector view
We maintain a positive view on the sector.
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