Bhel: Back in order

New capacity will help the company execute its growing orders quickly.

After two consecutive quarters of subdued sales growth, the Rs 19,365 crore Bhel's June 2008 quarter sales were up a smart 34 per cent y-o-y at Rs 4,329 crore.

However, operating margins were down 100 basis points at 8.63 per cent since the firm had to set aside a higher sum for wages. Thus the operating profit grew just 20 per cent and if the net profit has risen by 30 per cent, it is because other income has been a contributor.

The good news is that the order book for the generator and turbines maker continues to be strong with an increase of 28 per cent during the quarter. The current order backlog at Rs 95,000 crore, up 52 per cent y-o-y, amounts to estimated revenues for the company for the next three years.

The only area of some concern is that Bhel's contingent liabilities for liquidated damages have risen over the past few years and amount to around Rs 800 crore.

Revenues for the June quarter were driven by the power division and the company was able to use the upgraded 10,000 mw of capacity. That should put to rest worries about Bhel's execution problems though many of its projects are running 9-15 months behind schedule.

While the company has managed to keep raw material costs in check""down by 70 basis points as a percentage of sales""costs should be watched over the next couple of quarters to see whether the impact of price increases in steel kicks in with a lag. About half of the firm's orders have price variation clauses; for the rest, the company attempts to build up an inventory of raw materials.

Competition from foreign players is imminent; however Bhel's order book is more than robust.

Bhel is expected to close FY09 with sales of close to Rs 27,000 crore and a net profit of Rs 3,400 crore. That should result in the earnings per share (eps) growing by about 20 per cent. The stock has lost 38 per cent since January 2008 compared with a 32 per cent fall in the Sensex.

At the current price of Rs1,590, it trades at just over 22 times estimated FY09 earnings and should be an outperformer.