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UBS Investment Research
Bharat Heavy Electricals Limited
3QFY11 results: Margins expand
„ 3Q FY11– Results were below UBS-e but ahead of consensus
In 3QFY11, revenues grew 19% y/y to Rs85.8bn (UBS-e Rs91.8bn). EBITDA
margins expanded 150bps y/y to 23.1% (UBS-e of 23.8%, consensus at 20%) and
PAT was up 25% y/y to Rs13.4bn (UBS-e Rs15bn, consensus at Rs12.9bn). The
above numbers are adjusted for one-time change in accounting methodology in Q3.
In 9mFY11, revenues are up 21% y/y to Rs236.7bn and recurring PAT grew 31%
y/y to Rs31.5bn, with EBITDA margins of 19.4% (+210 bps y/y). At the end of
3QFY11, the order book stands at Rs1.58 trillion, 10% up vs. FY10 order book.
„ Change in accounting methodology boosts reported PAT by Rs600m
Reported revenues were higher by Rs4.44bn due to a change in accounting policythe change was to remove mismatch in revenue recognition and creation of
provision at the completion of trial operations. This was a one-time change with
retrospective effect for ongoing projects. The corresponding impact on PBT/PAT
was Rs880/600m for the quarter (which we treat as exceptional).
„ Margin expansion led by lower raw material costs
Raw material to sales ratio was at ~53% in Q3, compared to ~58% in FY10 and
H1FY11. Management indicated that the reduction was led by operational
efficiencies, better buying practices and lower material consumption in Q3. BHEL
is also spending on R&D to reduce the imported content for supercritical boilers.
„ Valuation: Maintain Buy, PT of Rs2,950; top pick in capital goods space
We believe that with significant expansion in manufacturing capacity, BHEL may
benefit from operating leverage. We base our price target of Rs2,950 on a DCF
valuation. Our key assumptions are WACC of 11.9%, a medium-term growth rate
of 15%, and long-term growth of 5%.
Results below UBS-e but ahead of consensus
In 3QFY11, operating income grew 19%YoY to Rs85.8bn (UBS-e Rs91.8bn).
EBITDA margins expanded 150bps and the recurring PAT was up 25% YoY to
Rs13.4bn (UBS-e of Rs15bn). The results are below UBS-e but ahead of
consensus (PAT expectation of Rs12.9bn).
At the end of 3Q FY11, the order book stands at Rs1.58 trillion, 10% up vs.
FY10 order book.
On 9mFY1, the operating income is up 21% YoY to Rs236.7bn and recurring
PAT grew 31% YoY to Rs31.5bn.
Con call highlights
Exceptional income of Rs600m due to accounting change: Reported
revenues were higher by Rs4.44bn due to a change in accounting policy- the
method of calculating percentage completion was modified to the remove
mismatch in revenue recognition and creation of provision for contractual
obligation (at 2.5% of contract revenues) on the completion of trial operations.
This change would now ensure that only 2.5% of revenue is recognized on
completion of trial operation with corresponding provision for contractual
obligation. This was a one-time change with retrospective effect for ongoing
projects. The corresponding impact on PBT/PAT was Rs880/600m for the
quarter (which we treat as exceptional).
Order Inflow: In Q3 the total order inflow was of Rs122bn out of which 1)
power segment contributed Rs79bn (3300 MW) and 2) Industrial segment
contributed Rs27bn (including power orders of 680MW).
Raw material cost reduction: Mainly happened due to operational efficiencies,
better buying practices and lower material consumption for this quarter.
R&D: The company is trying to reduce its imported contents for supercritical
boilers and spending high amount in R&D for the same.
Staff cost: Company highlighted that staff cost for FY11 would be around 56bn.
NTPC bulk tendering: The company expects that NTPC will finalise the same
within FY11.
Q Bharat Heavy Electricals Limited
Bharat Heavy Electricals (BHEL) focuses on the Indian power equipment
business. Its main customers are National Thermal Power Corporation (NTPC)
and state electricity boards that account for over 70% of revenue. BHEL also
services the power transmission, captive power plant, industrial equipment, and
the transport segments. It is 68%-owned by the Government of India.
Q Statement of Risk
The key risks for BHEL remain execution, delivery, raw material costs, and
order inflows.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Bharat Heavy Electricals Limited
3QFY11 results: Margins expand
„ 3Q FY11– Results were below UBS-e but ahead of consensus
In 3QFY11, revenues grew 19% y/y to Rs85.8bn (UBS-e Rs91.8bn). EBITDA
margins expanded 150bps y/y to 23.1% (UBS-e of 23.8%, consensus at 20%) and
PAT was up 25% y/y to Rs13.4bn (UBS-e Rs15bn, consensus at Rs12.9bn). The
above numbers are adjusted for one-time change in accounting methodology in Q3.
In 9mFY11, revenues are up 21% y/y to Rs236.7bn and recurring PAT grew 31%
y/y to Rs31.5bn, with EBITDA margins of 19.4% (+210 bps y/y). At the end of
3QFY11, the order book stands at Rs1.58 trillion, 10% up vs. FY10 order book.
„ Change in accounting methodology boosts reported PAT by Rs600m
Reported revenues were higher by Rs4.44bn due to a change in accounting policythe change was to remove mismatch in revenue recognition and creation of
provision at the completion of trial operations. This was a one-time change with
retrospective effect for ongoing projects. The corresponding impact on PBT/PAT
was Rs880/600m for the quarter (which we treat as exceptional).
„ Margin expansion led by lower raw material costs
Raw material to sales ratio was at ~53% in Q3, compared to ~58% in FY10 and
H1FY11. Management indicated that the reduction was led by operational
efficiencies, better buying practices and lower material consumption in Q3. BHEL
is also spending on R&D to reduce the imported content for supercritical boilers.
„ Valuation: Maintain Buy, PT of Rs2,950; top pick in capital goods space
We believe that with significant expansion in manufacturing capacity, BHEL may
benefit from operating leverage. We base our price target of Rs2,950 on a DCF
valuation. Our key assumptions are WACC of 11.9%, a medium-term growth rate
of 15%, and long-term growth of 5%.
Results below UBS-e but ahead of consensus
In 3QFY11, operating income grew 19%YoY to Rs85.8bn (UBS-e Rs91.8bn).
EBITDA margins expanded 150bps and the recurring PAT was up 25% YoY to
Rs13.4bn (UBS-e of Rs15bn). The results are below UBS-e but ahead of
consensus (PAT expectation of Rs12.9bn).
At the end of 3Q FY11, the order book stands at Rs1.58 trillion, 10% up vs.
FY10 order book.
On 9mFY1, the operating income is up 21% YoY to Rs236.7bn and recurring
PAT grew 31% YoY to Rs31.5bn.
Exceptional income of Rs600m due to accounting change: Reported
revenues were higher by Rs4.44bn due to a change in accounting policy- the
method of calculating percentage completion was modified to the remove
mismatch in revenue recognition and creation of provision for contractual
obligation (at 2.5% of contract revenues) on the completion of trial operations.
This change would now ensure that only 2.5% of revenue is recognized on
completion of trial operation with corresponding provision for contractual
obligation. This was a one-time change with retrospective effect for ongoing
projects. The corresponding impact on PBT/PAT was Rs880/600m for the
quarter (which we treat as exceptional).
Order Inflow: In Q3 the total order inflow was of Rs122bn out of which 1)
power segment contributed Rs79bn (3300 MW) and 2) Industrial segment
contributed Rs27bn (including power orders of 680MW).
Raw material cost reduction: Mainly happened due to operational efficiencies,
better buying practices and lower material consumption for this quarter.
R&D: The company is trying to reduce its imported contents for supercritical
boilers and spending high amount in R&D for the same.
Staff cost: Company highlighted that staff cost for FY11 would be around 56bn.
NTPC bulk tendering: The company expects that NTPC will finalise the same
within FY11.
Q Bharat Heavy Electricals Limited
Bharat Heavy Electricals (BHEL) focuses on the Indian power equipment
business. Its main customers are National Thermal Power Corporation (NTPC)
and state electricity boards that account for over 70% of revenue. BHEL also
services the power transmission, captive power plant, industrial equipment, and
the transport segments. It is 68%-owned by the Government of India.
Q Statement of Risk
The key risks for BHEL remain execution, delivery, raw material costs, and
order inflows.
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