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Bharat Heavy Electricals (BHEL)
Industrials
Quarter good but coal could take a further toll. Flash results saw performance in
line with expectations (revenues miss; PBT in line; inflows meet target). However, order
inflows are supported by EPC orders (by about Rs40 bn and flattish on MW basis) and
industrial inflows have declined. Coal availability can impede execution and inflows as
about 40% of inflows over the past two years do not have coal linkage and another
30% depend on captive blocks /imported coal. Retain REDUCE on flattish inflows, coal
and competition.
Revenues and profits affected by accounting change related one-off; adjusted values in line
BHEL has reported a revenue line of Rs434 bn, PBT of Rs90 bn and PAT of Rs60 bn versus our
expectation of Rs421 bn, Rs85 bn and Rs56.5 bn, respectively. BHEL has changed the accounting
policy leading to early recognition of warranty obligation related revenues and cost (2.5% of total
project revenues), increasing revenues by Rs24.6 bn and PBT by Rs4.1 bn. Adjusted for these,
revenue and PBT would be Rs409 bn and Rs85.9 bn versus our expectation of Rs421 bn and Rs85 bn,
respectively. The management believes US$10 bn revenues and Rs660 bn of inflows are achievable.
Meets order inflow; lower industrial and flat power (MW-basis) made up by (in-house) EPC orders
BHEL secured orders worth Rs605 bn meeting management guidance (Rs600 bn). Industrial order
flows at Rs114 bn declined (Rs144 bn in FY2010) due to absence of large order wins in FY2011
(6X150 MW Hindalco in FY2010). FY2011 power orders (Rs464 bn) corresponded to 15GW and
were negative yoy (16.5 GW in FY2010). Power orders include several in-house EPC orders
(3.1 GW) at Rs40 mn pricing vs. Rs22-25mn/MW, leading to excess recognition of Rs37-40 bn.
Coal can squeeze execution and inflows; >40% of inflows over last two years do not have linkage
BHEL’s order inflows over the past two years may face execution delays due lack of coal linkages.
42% (12.6 GW out of 31 GW) of orders amounting to Rs350 bn won post March-09 do not have
coal linkage as yet. Another 30% (10 MW and Rs253 bn) are dependant on captive coal blocks/
imported coal where in mining progress may be slower-than-expected. Coal linkages may be
received going forward but in the meantime this issue can slow execution. Private projects (22%
of total – pending linkage and another 22% based on captive) belonging to smaller utilities on
sub-critical technology may face a bigger hurdle as coal policy incentivizes supercritical (in addition
to progress on land acquisition (50% marks) and makes a reservation (60%) for the public sector.
Retain REDUCE on back of sedate inflows and deteriorating competitive and coal position
Retain Reduce with a target price of Rs2,400 based on (1) relatively flat order inflows considering
sector prospects and competition affecting medium-term growth, (2) coal availability seriously
impeding execution and inflows and (3) strong domestic- as well as imports-based competition.
Revenue and PAT broadly in line post adjustment for large positive one-off
BHEL has reported a revenue line of Rs434 bn versus our expectation of Rs421 bn. PBT of
Rs90 bn versus our expectation of Rs85 bn and PAT of Rs60 bn versus our expectation of
Rs56.5 bn. In terms of 4QFY11 results, flash results imply net revenues of about Rs187 bn,
up 7.6% versus our estimate of Rs174 bn. Flash results imply 4QFY11 PBT of Rs43 bn versus
our estimate of Rs37 bn (up 14.7% versus estimate) and PAT of Rs28 bn versus our
estimate of Rs24.4 bn.
BHEL has changed its accounting policy and this has contributed to increased revenues by
Rs24.6 bn and increased PBT by Rs4.1 bn. Adjusted for these two, the revenue would be
Rs409 bn (Rs421 bn our expectation) and PBT would be Rs85.9 bn (Rs85 bn our expectation),
just about meeting expectations.
Recognizing warranty cost accelerates revenue and profit booking
BHEL is now accounting for warranty obligation related revenues and costs (2.5% of total
project revenues) along the project progress versus earlier policy of accounting for these
revenues only at the stage of trial operation. This accelerates revenue booking for all under
construction projects and brings higher revenues and profits in the year in which this
accounting policy is changed.
Order inflows just about make it to guidance
BHEL reported order flows of Rs605 bn in FY2011 just about reaching the management
guidance and our estimate of Rs600 bn. This represents an increase of 2.5% on a yoy basis.
BHEL announcements so far added to only Rs500 bn. BHEL had reported order inflows of
Rs388 bn (as per analyst conference call) at the end of 9MFY11 implying order inflow of
Rs217 bn in 4QFY11. The company reported an order backlog of Rs1,610 bn at end-FY2011,
which provides about 3.9 years of visibility based on forward four-quarter revenues.
Industry orders decline in absence of repeat orders
Industry order flows for FY2011 declined to Rs114 bn from Rs144 bn in FY2010. The decline
was caused by absence of repeat orders on the back of large order wins in FY2010 (6X150
MW Hindalco order). The sector includes orders for captive power, transportation,
transmission, oil and gas, renewable energy and other industrial sectors.
Pending coal linkage and dependence on captive blocks weakens order book
To determine the strength of BHEL’s order book, we tracked its power orders for the past
two years (execution base). We categorized the coal based power orders into (1) captive
orders (including tapering linkage orders), (2) orders having coal linkage and (3) orders with
pending coal linkage. Of the total domestic coal based power awards of Rs840 bn, about
Rs353 bn (42%) worth orders await coal linkage from Ministry of Coal. A similar scenario
exists of the MW share of orders with pending coal linkage (38% or 12.5GW).
Subcritical orders from smaller private utilities face more trouble as SC and state are
preferred for coal allocation
The private sector orders with pending coal linkage still contribute about 22% of BHEL’s
total domestic order post March-09. We are more concerned about these private orders
since the Ministry of Power earmarks 60% of its coal allocation solely for central/state power
and Case II projects (tariff competitively bid) and also gives higher marks to projects based
on supercritical technology. We have elaborated on the coal allocation norms later in the
note.
Preference for public projects, priority score decides when to receive coal
linkage
To balance reduced supply of coal with the increased demand, the Ministry of Power has
decided to prioritize coal awards to end users based select parameters. These include
technology (supercritical/subcritical), location and progress made on land acquisitions
amongst others. The ministry scores each end user (fulfilling certain pre-qualification
requirement) on these parameters and awards coal in the order of their score.
Apart from this scoring system, the ministry earmarks (1) 60% share to central/state sector
projects including competitively bid projects (Case-II), (2) 35% share of Independent power
producers and (3) 5% for captive power plant players.
Captive coal blocks development may also be slower than expected
About 30% of the order inflows for BHEL over the past two years depend on captive coal
blocks and these orders may also slower execution if the development of associated coal
block is slower-than-expected. We highlight the timeline of key milestones for captive coal
block development.
Key milestones are (1) environmental and forest clearance (2) land acquisition and (3) actual
production from the captive mines. After being awarded the coal block, production has to
commence within 36 months (42 months in case the area is in forest land ) of the date of
allocation in OC mine and in 48 months (54 months for forest land ) from the date of
allocation in UG mine.
Linkage by itself does not provide full guarantee of supply
There have been instances in the recent part when coal linkage being awarded has not led
to supply of coal. Reliance Rosa thermal power plant was a recent case where the company
had to finally import coal since supply from CIL failed to materialize. Several other utilities
have faced the issue of receiving lesser than expected coal (versus linkage) and thus having
problems in meeting obligations to supply power to state utilities as per contracts.
Other key highlights from the flash results
Increased investment: BHEL reported its highest ever capital investment of Rs17.7 bn
in FY2011. BHEL recruited 3658 persons in FY2011. This implies total recruitment of
15,606 persons in the past four years.
Partnerships expanding scope: The management highlighted partnerships in the
areas of water treatment systems (GE India), concentrated solar TPP business (Abengoa,
Spain) and wind (government of Kerala)
First to manufacture1200 kV transformers: BHEL became the first Indian company to
manufacture 1200 kV transformers. It has also developed 1200 kV capacitor Voltage
Transformer for the 1200 kV transmission line at Bina.
Increase focus on efficient manufacturing: BHEL management took many initiatives
like vendor base expansion, outsourcing advanced tools and global sourcing to make its
supply chain more responsive. Capacity building initiatives like Lean manufacturing,
Design-to-cost and purchase-supply-management were undertaken to increase BHEL’s
cost competitiveness.
Reiterate REDUCE with TP of Rs2,400 on flattish inflows, coal and competition
We reiterate our REDUCE rating based on unchanged estimates and target price based on
unchanged business call of likely flattish order inflows leading to slower growth post
FY2012E. Aggressive price competition in boiler bulk tender may be a near-term negative
catalyst. The same is indicated in BHEL securing orders for only 2 out of the 5 units it bid for
in the NTPC bulk tender ordering for turbines. Order inflows have primarily come from
relatively smaller utilities (Adhunik, India Bulls etc.) potentially exposing BHEL to higher
execution risks. Coal linkage concerns based on higher share of private sector orders may
further delay execution apart from impeding further inflows as well.
Flash results have conservative bias; upgraded significantly in FY2009
BHEL has made significant positive revisions to flash earnings in the past. For instance,
FY2009 flash results suggested gross sales of Rs275 bn, PBT of Rs45.3 bn and PAT of Rs30.4
bn. Final audited numbers for FY2009 were gross sales of Rs281 bn, PBT of Rs48.4 and PAT
of Rs31.3 bn. In FY2010, the extent of upward revision was smaller with earnings increasing
by 0.4%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals (BHEL)
Industrials
Quarter good but coal could take a further toll. Flash results saw performance in
line with expectations (revenues miss; PBT in line; inflows meet target). However, order
inflows are supported by EPC orders (by about Rs40 bn and flattish on MW basis) and
industrial inflows have declined. Coal availability can impede execution and inflows as
about 40% of inflows over the past two years do not have coal linkage and another
30% depend on captive blocks /imported coal. Retain REDUCE on flattish inflows, coal
and competition.
Revenues and profits affected by accounting change related one-off; adjusted values in line
BHEL has reported a revenue line of Rs434 bn, PBT of Rs90 bn and PAT of Rs60 bn versus our
expectation of Rs421 bn, Rs85 bn and Rs56.5 bn, respectively. BHEL has changed the accounting
policy leading to early recognition of warranty obligation related revenues and cost (2.5% of total
project revenues), increasing revenues by Rs24.6 bn and PBT by Rs4.1 bn. Adjusted for these,
revenue and PBT would be Rs409 bn and Rs85.9 bn versus our expectation of Rs421 bn and Rs85 bn,
respectively. The management believes US$10 bn revenues and Rs660 bn of inflows are achievable.
Meets order inflow; lower industrial and flat power (MW-basis) made up by (in-house) EPC orders
BHEL secured orders worth Rs605 bn meeting management guidance (Rs600 bn). Industrial order
flows at Rs114 bn declined (Rs144 bn in FY2010) due to absence of large order wins in FY2011
(6X150 MW Hindalco in FY2010). FY2011 power orders (Rs464 bn) corresponded to 15GW and
were negative yoy (16.5 GW in FY2010). Power orders include several in-house EPC orders
(3.1 GW) at Rs40 mn pricing vs. Rs22-25mn/MW, leading to excess recognition of Rs37-40 bn.
Coal can squeeze execution and inflows; >40% of inflows over last two years do not have linkage
BHEL’s order inflows over the past two years may face execution delays due lack of coal linkages.
42% (12.6 GW out of 31 GW) of orders amounting to Rs350 bn won post March-09 do not have
coal linkage as yet. Another 30% (10 MW and Rs253 bn) are dependant on captive coal blocks/
imported coal where in mining progress may be slower-than-expected. Coal linkages may be
received going forward but in the meantime this issue can slow execution. Private projects (22%
of total – pending linkage and another 22% based on captive) belonging to smaller utilities on
sub-critical technology may face a bigger hurdle as coal policy incentivizes supercritical (in addition
to progress on land acquisition (50% marks) and makes a reservation (60%) for the public sector.
Retain REDUCE on back of sedate inflows and deteriorating competitive and coal position
Retain Reduce with a target price of Rs2,400 based on (1) relatively flat order inflows considering
sector prospects and competition affecting medium-term growth, (2) coal availability seriously
impeding execution and inflows and (3) strong domestic- as well as imports-based competition.
Revenue and PAT broadly in line post adjustment for large positive one-off
BHEL has reported a revenue line of Rs434 bn versus our expectation of Rs421 bn. PBT of
Rs90 bn versus our expectation of Rs85 bn and PAT of Rs60 bn versus our expectation of
Rs56.5 bn. In terms of 4QFY11 results, flash results imply net revenues of about Rs187 bn,
up 7.6% versus our estimate of Rs174 bn. Flash results imply 4QFY11 PBT of Rs43 bn versus
our estimate of Rs37 bn (up 14.7% versus estimate) and PAT of Rs28 bn versus our
estimate of Rs24.4 bn.
BHEL has changed its accounting policy and this has contributed to increased revenues by
Rs24.6 bn and increased PBT by Rs4.1 bn. Adjusted for these two, the revenue would be
Rs409 bn (Rs421 bn our expectation) and PBT would be Rs85.9 bn (Rs85 bn our expectation),
just about meeting expectations.
Recognizing warranty cost accelerates revenue and profit booking
BHEL is now accounting for warranty obligation related revenues and costs (2.5% of total
project revenues) along the project progress versus earlier policy of accounting for these
revenues only at the stage of trial operation. This accelerates revenue booking for all under
construction projects and brings higher revenues and profits in the year in which this
accounting policy is changed.
Order inflows just about make it to guidance
BHEL reported order flows of Rs605 bn in FY2011 just about reaching the management
guidance and our estimate of Rs600 bn. This represents an increase of 2.5% on a yoy basis.
BHEL announcements so far added to only Rs500 bn. BHEL had reported order inflows of
Rs388 bn (as per analyst conference call) at the end of 9MFY11 implying order inflow of
Rs217 bn in 4QFY11. The company reported an order backlog of Rs1,610 bn at end-FY2011,
which provides about 3.9 years of visibility based on forward four-quarter revenues.
Industry orders decline in absence of repeat orders
Industry order flows for FY2011 declined to Rs114 bn from Rs144 bn in FY2010. The decline
was caused by absence of repeat orders on the back of large order wins in FY2010 (6X150
MW Hindalco order). The sector includes orders for captive power, transportation,
transmission, oil and gas, renewable energy and other industrial sectors.
Pending coal linkage and dependence on captive blocks weakens order book
To determine the strength of BHEL’s order book, we tracked its power orders for the past
two years (execution base). We categorized the coal based power orders into (1) captive
orders (including tapering linkage orders), (2) orders having coal linkage and (3) orders with
pending coal linkage. Of the total domestic coal based power awards of Rs840 bn, about
Rs353 bn (42%) worth orders await coal linkage from Ministry of Coal. A similar scenario
exists of the MW share of orders with pending coal linkage (38% or 12.5GW).
Subcritical orders from smaller private utilities face more trouble as SC and state are
preferred for coal allocation
The private sector orders with pending coal linkage still contribute about 22% of BHEL’s
total domestic order post March-09. We are more concerned about these private orders
since the Ministry of Power earmarks 60% of its coal allocation solely for central/state power
and Case II projects (tariff competitively bid) and also gives higher marks to projects based
on supercritical technology. We have elaborated on the coal allocation norms later in the
note.
Preference for public projects, priority score decides when to receive coal
linkage
To balance reduced supply of coal with the increased demand, the Ministry of Power has
decided to prioritize coal awards to end users based select parameters. These include
technology (supercritical/subcritical), location and progress made on land acquisitions
amongst others. The ministry scores each end user (fulfilling certain pre-qualification
requirement) on these parameters and awards coal in the order of their score.
Apart from this scoring system, the ministry earmarks (1) 60% share to central/state sector
projects including competitively bid projects (Case-II), (2) 35% share of Independent power
producers and (3) 5% for captive power plant players.
Captive coal blocks development may also be slower than expected
About 30% of the order inflows for BHEL over the past two years depend on captive coal
blocks and these orders may also slower execution if the development of associated coal
block is slower-than-expected. We highlight the timeline of key milestones for captive coal
block development.
Key milestones are (1) environmental and forest clearance (2) land acquisition and (3) actual
production from the captive mines. After being awarded the coal block, production has to
commence within 36 months (42 months in case the area is in forest land ) of the date of
allocation in OC mine and in 48 months (54 months for forest land ) from the date of
allocation in UG mine.
Linkage by itself does not provide full guarantee of supply
There have been instances in the recent part when coal linkage being awarded has not led
to supply of coal. Reliance Rosa thermal power plant was a recent case where the company
had to finally import coal since supply from CIL failed to materialize. Several other utilities
have faced the issue of receiving lesser than expected coal (versus linkage) and thus having
problems in meeting obligations to supply power to state utilities as per contracts.
Other key highlights from the flash results
Increased investment: BHEL reported its highest ever capital investment of Rs17.7 bn
in FY2011. BHEL recruited 3658 persons in FY2011. This implies total recruitment of
15,606 persons in the past four years.
Partnerships expanding scope: The management highlighted partnerships in the
areas of water treatment systems (GE India), concentrated solar TPP business (Abengoa,
Spain) and wind (government of Kerala)
First to manufacture1200 kV transformers: BHEL became the first Indian company to
manufacture 1200 kV transformers. It has also developed 1200 kV capacitor Voltage
Transformer for the 1200 kV transmission line at Bina.
Increase focus on efficient manufacturing: BHEL management took many initiatives
like vendor base expansion, outsourcing advanced tools and global sourcing to make its
supply chain more responsive. Capacity building initiatives like Lean manufacturing,
Design-to-cost and purchase-supply-management were undertaken to increase BHEL’s
cost competitiveness.
Reiterate REDUCE with TP of Rs2,400 on flattish inflows, coal and competition
We reiterate our REDUCE rating based on unchanged estimates and target price based on
unchanged business call of likely flattish order inflows leading to slower growth post
FY2012E. Aggressive price competition in boiler bulk tender may be a near-term negative
catalyst. The same is indicated in BHEL securing orders for only 2 out of the 5 units it bid for
in the NTPC bulk tender ordering for turbines. Order inflows have primarily come from
relatively smaller utilities (Adhunik, India Bulls etc.) potentially exposing BHEL to higher
execution risks. Coal linkage concerns based on higher share of private sector orders may
further delay execution apart from impeding further inflows as well.
Flash results have conservative bias; upgraded significantly in FY2009
BHEL has made significant positive revisions to flash earnings in the past. For instance,
FY2009 flash results suggested gross sales of Rs275 bn, PBT of Rs45.3 bn and PAT of Rs30.4
bn. Final audited numbers for FY2009 were gross sales of Rs281 bn, PBT of Rs48.4 and PAT
of Rs31.3 bn. In FY2010, the extent of upward revision was smaller with earnings increasing
by 0.4%.
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