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Bharat Heavy Electricals (BHEL) Overweight
BHEL.BO, BHEL IN
Profit beat led by unexplained variations in operating
costs, but execution is weak
Sharp margin improvement caused profit beat, even as execution
falters: BHEL reported PAT of Rs8.15bn (up 22.1% YoY) ahead of our and
street expectations. Jun-q sales growth of 10% YoY was weak and well
below our expectation of ~20% YoY growth. The weakness mainly
stemmed from power project execution (power revenues up only 8%). On
the other hand, EBITDA margin improved 70bps to 15.3% on a high base of
Jun-q last year. In a tough commodity price environment, it is surprising to
us that RM/sales declined 55bps. Other expenses to sales was up sharply
(~240bps) but the impact was offset by lower staff cost (down 2.8% YoY).
On a segmental basis, it was surprising to us that the industry segment
showed a sharp 870bps EBIT margin improvement (to 22.6%), but power
showed 340bps margin decline to 16.5%. Other income was 52% higher and
the tax rate declined by 230bps yoy to 31%. Thus, there are a few
unexplained aspects in BHEL’s results and higher non-operating income /
lower tax seems to have contributed to the beat, more than core execution
growth.
Order inflows in Jun-q quite weak: BHEL reported an order backlog of
Rs1596bn down 2.8% qoq. We infer that order inflows (calculated) in Jun-q
were ~Rs29bn only, well below Rs108bn in 1QFY11. No major order had
been reported by BHEL during the quarter, but it has become a recent trend
with the PSU that orders are disclosed end of quarter rather than during the
quarter. Given this trend, the weak flow might be seen as disappointing.
Rising interest rates/fuel issues for IPPs seem to be causing delays in project
awards. As of today, 11x660MW NTPC boiler tenders have been delayed
and no progress seems to have been made in awarding of state JV orders.
The stock is down, intra-day, post results, which we think is due to weak
execution, unexplainable aspects, and the fact that non-operational items
partly contributed to the beat. Management clarity on these aspects in
today’s earnings call will be a potential stock catalyst.
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
Profit beat led by unexplained variations in operating
costs, but execution is weak
Sharp margin improvement caused profit beat, even as execution
falters: BHEL reported PAT of Rs8.15bn (up 22.1% YoY) ahead of our and
street expectations. Jun-q sales growth of 10% YoY was weak and well
below our expectation of ~20% YoY growth. The weakness mainly
stemmed from power project execution (power revenues up only 8%). On
the other hand, EBITDA margin improved 70bps to 15.3% on a high base of
Jun-q last year. In a tough commodity price environment, it is surprising to
us that RM/sales declined 55bps. Other expenses to sales was up sharply
(~240bps) but the impact was offset by lower staff cost (down 2.8% YoY).
On a segmental basis, it was surprising to us that the industry segment
showed a sharp 870bps EBIT margin improvement (to 22.6%), but power
showed 340bps margin decline to 16.5%. Other income was 52% higher and
the tax rate declined by 230bps yoy to 31%. Thus, there are a few
unexplained aspects in BHEL’s results and higher non-operating income /
lower tax seems to have contributed to the beat, more than core execution
growth.
Order inflows in Jun-q quite weak: BHEL reported an order backlog of
Rs1596bn down 2.8% qoq. We infer that order inflows (calculated) in Jun-q
were ~Rs29bn only, well below Rs108bn in 1QFY11. No major order had
been reported by BHEL during the quarter, but it has become a recent trend
with the PSU that orders are disclosed end of quarter rather than during the
quarter. Given this trend, the weak flow might be seen as disappointing.
Rising interest rates/fuel issues for IPPs seem to be causing delays in project
awards. As of today, 11x660MW NTPC boiler tenders have been delayed
and no progress seems to have been made in awarding of state JV orders.
The stock is down, intra-day, post results, which we think is due to weak
execution, unexplainable aspects, and the fact that non-operational items
partly contributed to the beat. Management clarity on these aspects in
today’s earnings call will be a potential stock catalyst.
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