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Bharat Heavy Electricals (BHEL)
Overweight
BHEL.BO, BHEL IN
Earnings call - Management commentary encouraging
• Amidst rampant project deferrals and capex uncertainty, BHEL's earnings
call had an assuaging tone. 1) Would meet order flow guidance of Rs600B
for the year, implying Rs216B of new orders for 4QFY11. 2) Would
maintain revenue growth trajectory and operating margins, the former led
by capacity expansions and latter by reducing staff cost ratio, stable
RM/Sales. 3) Possibility of growth in new orders for FY12. 4) Capacity
ramp-up to 20GW on track. 5) hope of import duty on PPE during budget-
11, and 6) does not expect increasing commodity costs to impact margins,
given PVCs for 50% of OB.
• Why this dichotomy between L&T and BHEL? BHEL has managed
expectations better, while L&T had overestimated growth again (in FY10,
L&T's revenue growth had fallen shy of management outlook). L&T was
guiding to 25% order flow growth for the year (in hindsight, aggressive) and
might miss this on account of project deferrals. BHEL was always guiding
to a no-growth order scenario and might meet this.
• Our take on the earnings call: (1) In our view, mgt statements were
mostly a reiteration of what is already in our numbers, at least for 4QFY11
and FY12 (barring minor adjustments) - however, while markets are edgy
on capex plays, a re-affirmation of growth outlook would be positive for
sentiment. (2) Long-term (FY13-17) growth and margins shall remain key
areas of concern. BHEL is hoping to use its cash (Rs98B last reported) to
fund projects via its proposed NBFC vehicle - prima facie, this would result
in higher yield on cash and might improve market share, but BHEL needs to
be cautious about quality of borrowers. (3) A steep commodity cost increase
is a downside risk to our estimates, notwithstanding management's take on
the same.
• After this late-Friday-night conference call by BHEL, it appears to us that
BHEL might outperform L&T, at least over the next few quarters. We
are reviewing our long-term margin estimates in light of recent data points
on Chinese and local competition, but in our view the changes are unlikely
to significantly impact our current view. We maintain OW with PT of
Rs2780.
3QFY11 results: execution lower, margins
higher than expectation
BHEL made an important accounting change in 3QFY11, adjusting revenue
recognition for its ongoing projects to reflect only 2.5% deferral for trial operations.
In the past, the deferred component varied from 1-5% on case to case basis. This
caused a net increase of Rs4.44B in revenue recognition, and an increase of Rs880m
and Rs600M in PBT and PAT.
Adjusted for this change, BHEL’s net sales have come in below expectation. On the
other hand, reported margins are above our expectation (Table 2). On the whole,
BHEL’s adjusted PAT at Rs13.37B is above our estimate of Rs12.37B.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals (BHEL)
Overweight
BHEL.BO, BHEL IN
Earnings call - Management commentary encouraging
• Amidst rampant project deferrals and capex uncertainty, BHEL's earnings
call had an assuaging tone. 1) Would meet order flow guidance of Rs600B
for the year, implying Rs216B of new orders for 4QFY11. 2) Would
maintain revenue growth trajectory and operating margins, the former led
by capacity expansions and latter by reducing staff cost ratio, stable
RM/Sales. 3) Possibility of growth in new orders for FY12. 4) Capacity
ramp-up to 20GW on track. 5) hope of import duty on PPE during budget-
11, and 6) does not expect increasing commodity costs to impact margins,
given PVCs for 50% of OB.
• Why this dichotomy between L&T and BHEL? BHEL has managed
expectations better, while L&T had overestimated growth again (in FY10,
L&T's revenue growth had fallen shy of management outlook). L&T was
guiding to 25% order flow growth for the year (in hindsight, aggressive) and
might miss this on account of project deferrals. BHEL was always guiding
to a no-growth order scenario and might meet this.
• Our take on the earnings call: (1) In our view, mgt statements were
mostly a reiteration of what is already in our numbers, at least for 4QFY11
and FY12 (barring minor adjustments) - however, while markets are edgy
on capex plays, a re-affirmation of growth outlook would be positive for
sentiment. (2) Long-term (FY13-17) growth and margins shall remain key
areas of concern. BHEL is hoping to use its cash (Rs98B last reported) to
fund projects via its proposed NBFC vehicle - prima facie, this would result
in higher yield on cash and might improve market share, but BHEL needs to
be cautious about quality of borrowers. (3) A steep commodity cost increase
is a downside risk to our estimates, notwithstanding management's take on
the same.
• After this late-Friday-night conference call by BHEL, it appears to us that
BHEL might outperform L&T, at least over the next few quarters. We
are reviewing our long-term margin estimates in light of recent data points
on Chinese and local competition, but in our view the changes are unlikely
to significantly impact our current view. We maintain OW with PT of
Rs2780.
higher than expectation
BHEL made an important accounting change in 3QFY11, adjusting revenue
recognition for its ongoing projects to reflect only 2.5% deferral for trial operations.
In the past, the deferred component varied from 1-5% on case to case basis. This
caused a net increase of Rs4.44B in revenue recognition, and an increase of Rs880m
and Rs600M in PBT and PAT.
Adjusted for this change, BHEL’s net sales have come in below expectation. On the
other hand, reported margins are above our expectation (Table 2). On the whole,
BHEL’s adjusted PAT at Rs13.37B is above our estimate of Rs12.37B.
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