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AR analysis; cut orders, earnings
BHEL’s working capital expanded from ~2% of revenues in FY10 to ~6%
in FY11, as debtor days increased from 220 to 230. Management
commentary has a cautious tone on new orders and competition. In the
current environment of coal shortages and delays in NTPC bulk tenders,
BHEL’s guidance of 10% growth in orders looks optimistic. We are cutting
our FY12 power sector order estimate by 27%, and FY12-13 revenues by
1-5% and PAT by 4-9%. We believe order flow should revive in FY13 as
NTPC bulk tenders are finalised and other bottlenecks are eased. BHEL is
trading at ~25% discount to its 10yr avg PE multiple and offers 17% EPS
Cagr over FY11-14. Maintain BUY with a lower TP of Rs2,150/sh.
Increase in working capital and investments
BHEL’s FY11 working capital rose to 6% of revenues (2% in FY10) due to a
30% YoY increase in debtors (debtor days rose from 220 to 230), while
customer advances grew modestly by 5% YoY. The company invested Rs3.3bn
in Raichur Power (51:49 JV with Karnataka govt) and spent Rs17bn to
increase its capacity from 15GW to 20GW by Mar-12. Higher working capital
and capex meant that cash stood flat YoY at Rs96bn (~Rs180/sh). The
change in accounting policy on warranty provisions could be one of the
reasons for higher working capital. The working capital is likely to remain
under pressure as we expect a decline in new orders going forward.
Accounting policy changes; cautious management commentary
BHEL’s FY11 performance (26% YoY revenue growth; 240bps Ebitda margin
expansion) was helped by changes in accounting policies relating to
warranties, employee costs and depreciation. Adjusted for these, revenues
rose 15% YoY and Ebitda margins improved by 150 bps. Management’s
commentary is cautious - suggesting that intensifying competition, volatile
commodity costs and worsening macro environment is resulting in order
finalisation delays and could put pressure on operating margins.
Cut FY12-13 EPS by 4-9%; maintain BUY
In 1QFY12 analyst call, management had remained hopeful of achieving its
10% order inflow growth target (~Rs660bn) in FY12. However, this was
largely dependent on the two NTPC bulk tender orders, where there is a risk
of delay. We are consequently cutting our FY12 total order inflow estimate by
22% (27% cut to power orders) to Rs495bn (-18% YoY). The impact on
revenues will be relatively lower (1-5%) due to BHEL’s large backlog. We cut
FY12-13 EPS by 4-9% and we lower our target price to Rs2,150 (TP multiple
lowered from 14x to 13x). BHEL is trading at ~25% discount to its 10-year
average PE and offers 17% EPS Cagr over FY11-14. We expect a revival in
orders in FY13 and BHEL remains most competitive producer of power
equipment in India. A longer term upside of slowdown in orders could be that
some of the potential competitors will shelve/scale down their capacity plans.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
AR analysis; cut orders, earnings
BHEL’s working capital expanded from ~2% of revenues in FY10 to ~6%
in FY11, as debtor days increased from 220 to 230. Management
commentary has a cautious tone on new orders and competition. In the
current environment of coal shortages and delays in NTPC bulk tenders,
BHEL’s guidance of 10% growth in orders looks optimistic. We are cutting
our FY12 power sector order estimate by 27%, and FY12-13 revenues by
1-5% and PAT by 4-9%. We believe order flow should revive in FY13 as
NTPC bulk tenders are finalised and other bottlenecks are eased. BHEL is
trading at ~25% discount to its 10yr avg PE multiple and offers 17% EPS
Cagr over FY11-14. Maintain BUY with a lower TP of Rs2,150/sh.
Increase in working capital and investments
BHEL’s FY11 working capital rose to 6% of revenues (2% in FY10) due to a
30% YoY increase in debtors (debtor days rose from 220 to 230), while
customer advances grew modestly by 5% YoY. The company invested Rs3.3bn
in Raichur Power (51:49 JV with Karnataka govt) and spent Rs17bn to
increase its capacity from 15GW to 20GW by Mar-12. Higher working capital
and capex meant that cash stood flat YoY at Rs96bn (~Rs180/sh). The
change in accounting policy on warranty provisions could be one of the
reasons for higher working capital. The working capital is likely to remain
under pressure as we expect a decline in new orders going forward.
Accounting policy changes; cautious management commentary
BHEL’s FY11 performance (26% YoY revenue growth; 240bps Ebitda margin
expansion) was helped by changes in accounting policies relating to
warranties, employee costs and depreciation. Adjusted for these, revenues
rose 15% YoY and Ebitda margins improved by 150 bps. Management’s
commentary is cautious - suggesting that intensifying competition, volatile
commodity costs and worsening macro environment is resulting in order
finalisation delays and could put pressure on operating margins.
Cut FY12-13 EPS by 4-9%; maintain BUY
In 1QFY12 analyst call, management had remained hopeful of achieving its
10% order inflow growth target (~Rs660bn) in FY12. However, this was
largely dependent on the two NTPC bulk tender orders, where there is a risk
of delay. We are consequently cutting our FY12 total order inflow estimate by
22% (27% cut to power orders) to Rs495bn (-18% YoY). The impact on
revenues will be relatively lower (1-5%) due to BHEL’s large backlog. We cut
FY12-13 EPS by 4-9% and we lower our target price to Rs2,150 (TP multiple
lowered from 14x to 13x). BHEL is trading at ~25% discount to its 10-year
average PE and offers 17% EPS Cagr over FY11-14. We expect a revival in
orders in FY13 and BHEL remains most competitive producer of power
equipment in India. A longer term upside of slowdown in orders could be that
some of the potential competitors will shelve/scale down their capacity plans.
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