The order book is strong but a weak credit and operating environment may cause delays
On the face of it, engineering behemoth Bhel has a strong order book; at the end of the September 2008 quarter it stood at just over Rs 1 lakh crore, having grown by 43 per cent y-o-y. That’s more than five times last year’s sales. But the question is whether these orders will translate into revenues. Given that the shortage of liquidity worldwide will hurt companies’ ability to fund projects, some of these orders may remain on the book.
In a slowing economy when money is expensive, SEBs may delay payments or even orders. In fact fresh inflows during the September quarter actually fell marginally because of a high base in the previous year. If there are no delays and cancellations, revenues should grow by 25-30 per cent in FY09.
So far this year, the going has been good. In the September quarter, the company posted a sales growth of 35 per cent, much like it did in the June quarter. The execution was better because of the new capacity it added—taking the total to 10,000 MW. However, the higher cost of raw materials and employee costs (Sixth pay commission recommendations) dented the operating profit margin which fell by 420 basis points y-o-y to 13.3 per cent.
That meant a lower rise in the net profit which, when adjusted for interest income on a tax refund in the previous year, by 8.6 per cent y-o-y to Rs 616 crore. Bhel plans to spend Rs 4,200 crore to increase capacity to 15,000 MW by December 2009 and should be able to fund this through internal accruals.
With commodity prices falling, the raw material bill is expected to be smaller only towards the end of the financial year since Bhel has stocked up on inputs. Earnings should grow by about 20 per cent in the current year from Rs 58.4 in FY08; the stock currently trades at a pice-earnings multiple of 20 times estimated FY09 earnings.