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Operational performance above expectations: BHEL's 3QFY12 revenue grew 19% YoY to INR105b (v/s our
estimate of INR102b), driven by strong execution. Reported PAT of INR14.3b, up 2% YoY, was above our est. of
INR13.1b, driven by slightly better EBITDA margins at 19.4% v/s our est. of 18.5% and lower tax rate.
Orders see cancellations; order book declines 9% QoQ: Order intake for the first nine months of FY12 was
down 59% YoY at INR152b (v/s intake of INR168b in 1HFY12). During the quarter, orders worth INR58.5b were
cancelled, or their scope was changed. Order book stood at INR1,465b, down 9% QoQ and 7% YoY.
EBITDA margin hit by higher provisions: Adjusted EBITDA margin declined 380bp YoY, led by Power segment.
EBITDA margin was impacted by sharp rise in other expenditure, up 65% YoY (12.2% of sales v/s 8.8% in
3QFY11) which, in turn, was driven by much higher provisions mainly relating to contractual obligations and
liquidated damages.
Working capital deteriorates due to rise in debtors and decline in advances from customers: Working capital
deteriorated further due to rising receivables and declining advances from customers, given decline in fresh
order inflow. Net working capital (ex cash) increased from 17% of TTM revenue as at the end of 2QFY12 to 20%
at 3QFY12 end.
Maintain Neutral with target price of INR258: BHEL's stock price corrected significantly over the last one year.
We still remain Neutral on the stock, as we believe BHEL's valuations will remain under pressure due to
multiple de-rating triggers: (1) Possible downside to our order intake assumptions in FY12/13 due to worsening
external environment in the power sector, (2) Downside risk to FY13 earnings estimate due to execution
constraints and deteriorating working capital, and (3) Uncertainty around the company's proposed follow-on
offer (FPO).
Strong revenue growth driven by healthy execution; capacity expansion on
track
BHEL's 3QFY12 revenues stood at INR105b (up 19% YoY), higher than our estimates
of INR102b (up 15% YoY), driven by strong execution.
The Company maintained that execution on all power projects is on track and
there are no instances of slow moving orders, which will help boost revenue
growth in following quarters.
The company is well on track to expand capacity to 20GW per annum by the end of
FY12. We believe that with expanded capacity, BHEL will be able to grow production
at an accelerated pace in FY13-14.
PAT ahead of estimates, driven by higher sales and lower tax rate
Adjusted PAT for 3QFY12 was INR14.3b (flat YoY), ahead of our estimate.
Tax rate declined during the quarter to 31% from 32% in 3QFY11 because of tax
credit on account of R&D expenditure.
Growth in power division resumes; Industry division declines
Growth in Power segment revenues picked up strongly at 58% YoY on the back of
strong execution unlike 1HFY12 in which growth was muted at 9% YoY. Industrial
segment revenues declined 37% YoY. Power division contributed 78% to total
revenues and industrial division 22%.
EBIT margins in Power segment improved on a quarter on quarter basis (up 210bp
QoQ) driven by favorable sales mix. However margins are still subdued in
comparison to last year.
We believe that larger industrial projects with higher rated capacity will help
sustain margins. Also, we believe that margin decline in the Power segment is
temporary, and expect margins to revert to previous levels once the sales mix
reverses in coming quarters.
In the Industry segment, BHEL has made new forays into Railways (propulsion
systems for locomotives of 700HP range with Alstom), Defense (naval guns), etc.
These will keep the long-term drivers for the Industry segment intact. The
management foresees consistent revenue growth of 20-25% for this segment in
the next 4-5 years.
Orders sees cancellation for the first time, excluding cancellations order
intake stood at INR 43b, down 66% YoY
Order intake for the first nine month of FY12 stands at INR152b (against intake of
INR168b in 1HFY12), a YoY decline of 59%. During the quarter, orders worth
INR58.47b were cancelled, or their scope was changed. Cancelled orders include
a utility order from a private IPP (2 x 600MW) among others.
The company received Letter of award for a 300MW project worth INR 6300m from
Abhijit group for which the company is already executing 2x270 MW projects worth
INR12650m. BHEL also received Letter of intent from ONGC for 6 oil rigs worth
INR7740m. Power segment orders continue to show sluggish trend since beginning
of the year impacted by industry-wide issues relating to coal shortage, land
acquisition, high interest rate, etc. BHEL has not bagged any meaningful order in
the power segment apart from two major orders - 2x660MW from DB power worth
INR37.6b and 2x660MW from Singareni colliery worth INR40.72b during the first
half of the year.
The company has 15-20GW pipeline of Power segment orders at advanced stages
of booking (including NTPC bulk order) and another 1,500-2,000MW orders with
letter of intent. We believe BHEL stands to gain market share in FY12/13, given
that majority of orders will be in government sector.
NTPC opened price bids for boiler package of 9x800MW bulk tender worth INR120b
on 14 September 2011 followed by turbine package worth INR72b. As per the
tender document, the boiler package of the projects (4 projects with 9 boiler
units of 800MW each) will be awarded to two players (L1 and L2), with assured
order of 5 units (if L1) or 4 units (if L2) to BHEL (provided it matches L1 price). TG
package will be split among three players, with assured order of 5 units (if L1) or
2 units (if L2/L3 or lower) to BHEL (provided it matches L1 price). BHEL will win 4
boilers and 2 TG sets worth ~INR68b if it matches L1 price.
The boiler order awards, part of the bulk tendering by NTPC and DVC for 11 sets of
660MW are under arbitration due to the stay order brought in by one of the bidders,
Gammon-Ansaldo. The Supreme Court is expected to hear the case, following
which NTPC will open the price bids. Once this process is completed, we expect
final award of 11x660MW boiler and turbine package.
Working capital deteriorates due to rise in debtors and decline in advances
from customers
Working capital saw further deterioration due to rising receivables and declining
advances driven by decline in fresh order inflow. Net working capital excluding
cash increased from 17% of TTM revenue as at the end of 2QFY12 to 20% at 3QFY12
end.
Cash on books declined to INR50b as at 3QFY12, from INR79b at the end of 2QFY12
and INR96b at FY11-end.
Valuation and view: Maintain Neutral with target price of INR258
BHEL's stock price corrected significantly over the last one year. We still remain
Neutral on the stock, as we believe BHEL's valuations will remain under pressure
due to multiple de-rating triggers: (1) Possible downside to our order intake
assumptions in FY12/13 due to worsening external environment in the power
sector, (2) Downside risk to FY13 earnings estimate due to execution constraints
and deteriorating working capital, and (3) Uncertainty around the company's
proposed follow-on offer (FPO).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Operational performance above expectations: BHEL's 3QFY12 revenue grew 19% YoY to INR105b (v/s our
estimate of INR102b), driven by strong execution. Reported PAT of INR14.3b, up 2% YoY, was above our est. of
INR13.1b, driven by slightly better EBITDA margins at 19.4% v/s our est. of 18.5% and lower tax rate.
Orders see cancellations; order book declines 9% QoQ: Order intake for the first nine months of FY12 was
down 59% YoY at INR152b (v/s intake of INR168b in 1HFY12). During the quarter, orders worth INR58.5b were
cancelled, or their scope was changed. Order book stood at INR1,465b, down 9% QoQ and 7% YoY.
EBITDA margin hit by higher provisions: Adjusted EBITDA margin declined 380bp YoY, led by Power segment.
EBITDA margin was impacted by sharp rise in other expenditure, up 65% YoY (12.2% of sales v/s 8.8% in
3QFY11) which, in turn, was driven by much higher provisions mainly relating to contractual obligations and
liquidated damages.
Working capital deteriorates due to rise in debtors and decline in advances from customers: Working capital
deteriorated further due to rising receivables and declining advances from customers, given decline in fresh
order inflow. Net working capital (ex cash) increased from 17% of TTM revenue as at the end of 2QFY12 to 20%
at 3QFY12 end.
Maintain Neutral with target price of INR258: BHEL's stock price corrected significantly over the last one year.
We still remain Neutral on the stock, as we believe BHEL's valuations will remain under pressure due to
multiple de-rating triggers: (1) Possible downside to our order intake assumptions in FY12/13 due to worsening
external environment in the power sector, (2) Downside risk to FY13 earnings estimate due to execution
constraints and deteriorating working capital, and (3) Uncertainty around the company's proposed follow-on
offer (FPO).
Strong revenue growth driven by healthy execution; capacity expansion on
track
BHEL's 3QFY12 revenues stood at INR105b (up 19% YoY), higher than our estimates
of INR102b (up 15% YoY), driven by strong execution.
The Company maintained that execution on all power projects is on track and
there are no instances of slow moving orders, which will help boost revenue
growth in following quarters.
The company is well on track to expand capacity to 20GW per annum by the end of
FY12. We believe that with expanded capacity, BHEL will be able to grow production
at an accelerated pace in FY13-14.
PAT ahead of estimates, driven by higher sales and lower tax rate
Adjusted PAT for 3QFY12 was INR14.3b (flat YoY), ahead of our estimate.
Tax rate declined during the quarter to 31% from 32% in 3QFY11 because of tax
credit on account of R&D expenditure.
Growth in power division resumes; Industry division declines
Growth in Power segment revenues picked up strongly at 58% YoY on the back of
strong execution unlike 1HFY12 in which growth was muted at 9% YoY. Industrial
segment revenues declined 37% YoY. Power division contributed 78% to total
revenues and industrial division 22%.
EBIT margins in Power segment improved on a quarter on quarter basis (up 210bp
QoQ) driven by favorable sales mix. However margins are still subdued in
comparison to last year.
We believe that larger industrial projects with higher rated capacity will help
sustain margins. Also, we believe that margin decline in the Power segment is
temporary, and expect margins to revert to previous levels once the sales mix
reverses in coming quarters.
In the Industry segment, BHEL has made new forays into Railways (propulsion
systems for locomotives of 700HP range with Alstom), Defense (naval guns), etc.
These will keep the long-term drivers for the Industry segment intact. The
management foresees consistent revenue growth of 20-25% for this segment in
the next 4-5 years.
Orders sees cancellation for the first time, excluding cancellations order
intake stood at INR 43b, down 66% YoY
Order intake for the first nine month of FY12 stands at INR152b (against intake of
INR168b in 1HFY12), a YoY decline of 59%. During the quarter, orders worth
INR58.47b were cancelled, or their scope was changed. Cancelled orders include
a utility order from a private IPP (2 x 600MW) among others.
The company received Letter of award for a 300MW project worth INR 6300m from
Abhijit group for which the company is already executing 2x270 MW projects worth
INR12650m. BHEL also received Letter of intent from ONGC for 6 oil rigs worth
INR7740m. Power segment orders continue to show sluggish trend since beginning
of the year impacted by industry-wide issues relating to coal shortage, land
acquisition, high interest rate, etc. BHEL has not bagged any meaningful order in
the power segment apart from two major orders - 2x660MW from DB power worth
INR37.6b and 2x660MW from Singareni colliery worth INR40.72b during the first
half of the year.
The company has 15-20GW pipeline of Power segment orders at advanced stages
of booking (including NTPC bulk order) and another 1,500-2,000MW orders with
letter of intent. We believe BHEL stands to gain market share in FY12/13, given
that majority of orders will be in government sector.
NTPC opened price bids for boiler package of 9x800MW bulk tender worth INR120b
on 14 September 2011 followed by turbine package worth INR72b. As per the
tender document, the boiler package of the projects (4 projects with 9 boiler
units of 800MW each) will be awarded to two players (L1 and L2), with assured
order of 5 units (if L1) or 4 units (if L2) to BHEL (provided it matches L1 price). TG
package will be split among three players, with assured order of 5 units (if L1) or
2 units (if L2/L3 or lower) to BHEL (provided it matches L1 price). BHEL will win 4
boilers and 2 TG sets worth ~INR68b if it matches L1 price.
The boiler order awards, part of the bulk tendering by NTPC and DVC for 11 sets of
660MW are under arbitration due to the stay order brought in by one of the bidders,
Gammon-Ansaldo. The Supreme Court is expected to hear the case, following
which NTPC will open the price bids. Once this process is completed, we expect
final award of 11x660MW boiler and turbine package.
Working capital deteriorates due to rise in debtors and decline in advances
from customers
Working capital saw further deterioration due to rising receivables and declining
advances driven by decline in fresh order inflow. Net working capital excluding
cash increased from 17% of TTM revenue as at the end of 2QFY12 to 20% at 3QFY12
end.
Cash on books declined to INR50b as at 3QFY12, from INR79b at the end of 2QFY12
and INR96b at FY11-end.
Valuation and view: Maintain Neutral with target price of INR258
BHEL's stock price corrected significantly over the last one year. We still remain
Neutral on the stock, as we believe BHEL's valuations will remain under pressure
due to multiple de-rating triggers: (1) Possible downside to our order intake
assumptions in FY12/13 due to worsening external environment in the power
sector, (2) Downside risk to FY13 earnings estimate due to execution constraints
and deteriorating working capital, and (3) Uncertainty around the company's
proposed follow-on offer (FPO).
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