28 January 2012
3QFY12 Results Update | Sector: Capital Goods
BSE SENSEX S&P CNX
CMP: INR274 TP: INR258 Neutral
Bloomberg BHEL IN
Equity Shares (m) 2,447.6
52-Week Range (INR) 463/225
1,6,12 Rel. Perf. (%) 2/-21/-31
M.Cap. (INR b) 669.8
M.Cap. (USD b) 13.6
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
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
Dhirendra Tiwari (Dhirendra.Tiwari@MotilalOswal.com); Tel: +91 22 3029 5127
Deepak Narnolia (Deepak.Narnolia@MotilalOswal.com); Tel: +91 22 3029 5126
Strong revenue growth driven by healthy execution; capacity expansion on
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.
Strong revenue growth, driven by healthy execution
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.
28 January 2012 2
Segmental performance (INR m)
1Q 2Q 3Q 4Q 1Q 2Q 3Q
Revenues 67,869 87,155 92,798 188,535 74,332 107,575 110,783
Power 53,999 70,547 55,023 151,444 57,803 77,973 87,115
Growth (%) 18.2 30.0 (3.6) 35.8 7.0 10.5 58.3
Industry 13,870 16,608 37,775 37,091 16,529 29,602 23,668
Growth (%) 4.1 4.1 109.6 17.8 19.2 78.2 (37.3)
EBIT 12,405 17,554 20,863 51,213 13,314 21,163 24,046
Power 10,701 14,185 17,133 41,363 9,581 13,159 16,560
Growth (%) 29.2 71.3 52.7 216.1 (10.5) (7.2) (3.3)
Industry 1,704 3,368 3,730 9,851 3,733 8,004 7,486
Growth (%) 5.2 107.9 37.9 143.2 119.1 137.6 100.7
EBIT margin (%) 18.3 20.1 22.5 27.2 17.9 19.7 21.7
Power 19.8 20.1 31.1 27.3 16.6 16.9 19.0
Industry 12.3 20.3 9.9 26.6 22.6 27.0 31.6
EBITDA margin hit by higher provisions; Power segment profitability remains
Adjusted EBITDA margin during the quarter dipped 380bp YoY, led by Power
division margins. With growth in sales and possible correction in commodity prices,
we expect EBITDA margin to sustain at ~18-19% in FY12/13.
EBITDA margin during quarter was impacted by sharp rise in other expenditure
(up 65% YoY at 12.2% of sales v/s 8.8% YoY) driven by much higher provisions (net
addition of INR3.87b during the quarter v/s INR1.7b in 3QFY1) and increase in
other expenses like transportation cost.
RM/sales was 56% (up 270bp YoY) while staff cost declined 250bp YoY to 12.5% of
Operating cost break-up: Other expenses increased sharply due to higher provisions (%)
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 YoY.Ch (bp)
RM Cost 57.7 58.5 53.3 48.7 57.1 58.0 56.0 267
Staff Cost 20.3 14.9 14.9 7.9 17.9 12.8 12.5 (249)
Other Costs 7.4 7.4 8.8 19.9 9.7 10.6 12.2 342
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
28 January 2012 3
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.
BTB declining due to slowdown in Power sector Orders sees cancellations for the first time
Order intake impacted by slowdown in power segment Declining trend in BTB (x TTM)
28 January 2012 4
Working capital deteriorates due to rise in debtors and decline in advances
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
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).
Trading at 50% discount to its long term average PE Trading at steepest discount to Sensex in last 5 years
28 January 2012 5
BHEL: an investment profile
Company description Key investment risks
BHEL is India's dominant producer of power and The key challenge is to meet execution deadlines
industrial machinery and a leading EPC company, and improve cost efficiencies.
established in the late 1950s as the government's Intensified competition from Chinese, Korean and
wholly-owned subsidiary. Post divestment, the private Indian player (L&T).
government currently has an equity stake of 67.7%. BHEL
has 14 manufacturing divisions, 8 service centers, 4
The boiler order awards, part of the bulk tendering
power sector regional centers, besides project sites
by NTPC and DVC for 11 sets of 660MW are under
spread across India and abroad. It has an annual installed
arbitration due to the stay order brought in by one
capacity of 6,000MW. It has formed a tie-up with Alstom
of the bidders, Gammon-Ansaldo. The matter is sub-
and an alliance with Siemens for the manufacture of
judice in Supreme Court.
super-critical 800MW boilers and turbines, respectively.
BHEL is expected to win orders worth INR68b in NTPC
bulk tender-2 (9x800MW) if it matches L1 price.
Key investment arguments
Order backlog at the end of 3QFY12 stands at Valuation and view
INR1,465b, book-to-bill ratio of 3.2x TTM revenue, We expect BHEL's earnings and revenue to grow at a
providing the best revenue visibility in our Capital CAGR of 6% and 14%, respectively over FY11-13. Our
Goods universe. We expect earnings and revenue to EPS estimates are INR25 for FY12 and INR26 for FY13.
grow at a CAGR of 6% and 14%, respectively over We maintain Neutral rating on the stock due to
FY11-13. concerns on order inflow in the Power segment and
Post capacity expansion to 20GW by the end of FY12, growing execution risk. Our price target stands at
BHEL's capacity will be at par with its Chinese and INR258 (10x FY13E EPS).
Korean counterparts, giving BHEL sizeable muscle to
compete, execute and deliver on time. Sector view
We have a Neutral view on the sector.
Comparative valuations EPS: MOSL forecast v/s consensus (INR)
BHEL L&T Crompton MOSL Consensus Variation
P/E (x) FY12E 10.7 18.3 18.0 Forecast Forecast (%)
FY13E 10.6 16.5 12.8 FY12 25.5 26.9 -5.2
P/BV (x) FY12E 2.7 3.4 2.5 FY13 25.8 28.1 -8.2
FY13E 2.3 3.0 2.2
EV/Sales (x) FY12E 1.3 1.7 0.8 Target price and recommendation
FY13E 1.2 1.6 0.7 Current Target Upside Reco.
EV/EBITDA (x) FY12E 6.6 14.5 9.8 Price (INR) Price (INR) (%)
FY13E 6.7 13.9 7.2 274 258 -5.8 Neutral
Stock performance (1 year)
BHEL Sens ex - Reba s ed
Shareholding pattern (%) 425
Dec-11 Sep-11 Dec-10
Promoter 67.7 67.7 67.7
Domestic Inst 13.5 13.4 12.0
Foreign 12.4 13.0 14.1 200
Others 6.3 5.9 6.2 Ja n-11 Apr-11 Jul -11 Oct-11 Ja n-12
28 January 2012 6
Financials and Valuation
28 January 2012 7
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