BHEL: Executing at a frenetic pace

While the sector and the company hold a lot of promise, all eyes will be on whether the company is able to maintain margins

Things seem to be steadying down operationally for power equipment major Bharat Heavy Electricals (BHEL), as it reported strong growth in revenue and profit in the March 2010 quarter. Earlier pangs of high-wage costs and lowering of execution rates normalised during the period.

The power division, which contributes about 78 per cent to total revenues, recorded 30 per cent year-on-year growth to Rs 11,155 crore. The smart bounce back in the industry division, which recorded sales growth of 16 per cent after a subdued show in nine months of FY10, added to the cheer. Lower commodity prices and better inventory management kept material costs under control.

Moreover, huge provisions for wage-related expenses subsided. Consequently, operating profit jumped 43 per cent to Rs 2,872.50 crore and operating margins expanded by a little over 200 basis points to 20.6 per cent. Sales and operating profit also jumped 50 per cent and 47 per cent, respectively. Analysts reckon this as a strong performance, since this growth came on a higher base of the March 2009 quarter. In line with operating profits, net earnings also grew 42 per cent despite higher interest, depreciation and taxation partly.

With a strong order book position of Rs 1,44,000 crore — highest ever according to provisional results for FY10 — the future looks exciting for the company. The company has also been successful in gaining private sector’s confidence, with the latter forming about 85 per cent of the total order inflows. Capacity should not be a constraint, as the company has expanded it by 50 per cent to 15,000 Mw and will achieve 20,000 Mw by 2012.

However, with the power sector looking to expand at a rapid clip, strong execution will be a key factor to ward off competition. Its book-to-bill ratio has improved from a dismal 4.1 times in the December quarter to 4.4 times in the March quarter. Analysts believe when execution rates increase, operating profits tend to depress. Moreover, margins are sequentially down 100 basis points from their peak of 22 per cent in the December quarter. If commodity prices rise again, operating margins may deteriorate further.