Bharat Heavy Electricals Ltd’s (BHEL’s) results for the second quarter ended September 2011 were in line with Street expectations. However, the fall in margins and weak order inflows in the power business have left the Street worrying. The stock has lost six per cent post its results on Monday; it made a new 52-week low of Rs 286.50 on Wednesday before closing at Rs 297.65, reflecting a net loss of 4.15 per cent. In this backdrop, analysts are attaching lower PE valuations of 11-12 times one-year forward earnings (compared to about 20 times historically) to the stock, with a 12-month target price ranging Rs 300-315.
MARGIN CONCERNS
The company in its September quarter results reported a strong 24 per cent growth in revenue, which can be largely attributed to strong orders in the power equipment and EPC business. Additionally, the industrial segment, which sells process, automation, equipment and accounts for a little over a fourth of total revenues, reported a robust 78 per cent jump in revenues.
The good news, however, ends there. Although reported profit grew at 24 per cent, it was boosted by a change in accounting policy with respect to leave encashment. This one-off item added Rs 166 crore to profits; adjusted for this, profit growth would have come at 13 per cent. Operating profit margins, too, fell 60-basis points year-on-year during the quarter, partly due to rising competition and higher other expenditure led by provisions on contractual obligations (also seen in the previous two quarters). Here, the power business saw a sizeable 450-bps fall in margins, which was largely offset by the 1,060-bps rise in margins in the industrial equipment business.
| SLOW PROFIT GROWTH | ||
| In Rs crore | Q2’ FY12 | % chg y-o-y |
| Net sales | 10,546 | 24.2 |
| Operating margins (%) | 18.6 | -60 bps |
While the power business may get respite in the medium-term due to the expected imposition of import duty on power equipment, analysts expect the pressure on margins to stay in the near-term at least. This has also led them to cut their estimates for the company, although marginally by three-five per cent in terms of revenue and profits for 2012-13.
ORDER INFLOW MUTED
Apart from margins, analysts are also worried about order inflow. "We remain concerned on order inflow and margin pressure from super critical and EPC orders. The FPO overhang further adds to the woes," says Inderjeet Singh Bhatia, who tracks the company at Macquarie Equity Research.
Though the company has a strong order book of Rs 1,61,000 crore, which is over three times its estimated FY12 revenues and provides medium-term revenue visibility, its order inflow (or new orders) grew just six per cent yoy to Rs 14,306 crore during the September quarter. While this is a stark improvement from the 77 per cent decline in order inflows in the first quarter of 2011-12, it is far from healthy. Overall, for the first half, the order inflow is down by 39 per cent at Rs 17,200 crore, which is just about 26 per cent of the estimates for the entire year.
"In our view, BHEL would likely miss its FY12 order inflow target of Rs 66,000 crore," says Misal Singh of Religare Institutional Research. In addition, slow execution and disbursement of the funds to the power industry is putting pressure on the working capital situation. BHEL's working capital days have gone up to about 65, compared to 35 last year.