BHEL: In orderly fashion

The company has once again leveraged the boom in the power capex cycle

Bharat Heavy Electricals (BHEL) has once again leveraged the current boom in the power capex cycle in the March 2007 quarter and of crucial importance is that its operating margins have grown on a y-o-y basis, despite higher metal costs. As a result, operating profit has grown by 36.4 per cent y-o-y to Rs 1629.3 crore in Q4 FY07, while net sales improved 25.4 per cent to Rs 6919.68 crore.

Operating profit margin also improved 185 basis points y-o-y to 23.5 per cent in the last quarter. In FY07 too, operating profit margin grew 140 basis points y-o-y to 19.1 per cent, helped by total order inflows that grew 88 per cent y-o-y to Rs 35,633 crore. Clearly, the company's dominant position has helped it to clock such a performance.

No doubt, prices of non-ferrous and steel prices were higher on a y-o-y basis in Q4 FY07, but the company's adjusted raw material costs as a percentage of net sales were flat at 55.3 per cent in the last quarter.

Analysts highlight its recent contracts that allow it to pass on higher input costs to its customers. Segment profit of the power division grew 59.1 per cent y-o-y to Rs 1747.85 crore in the last quarter. Also, segment profit of its industry division grew 58.7 per cent y-o-y in the last quarter.

It's no surprise to see the stock outperform the broader market over the past three months "" the stock has gained 24.9 per cent during this period compared with an 11.3 per cent rise in the Sensex.

Going forward, the company's growth will be driven by its outstanding order book of Rs 55,000 crore at the end of FY07 compared with Rs 46,700 crore at the end of Q3 FY 07.

Also, the company's ability to keep higher raw material costs under check will be crucial. There are fears of Chinese competition, but analysts are divided on its impact on BHEL. At Rs 2728, the stock trades at 23 times estimated FY08 earnings, given its strong growth prospects.

ITC: Lower revenue growth

Though the markets were bullish on Monday, the ITC stock declined marginally as its financial results for the March 2007 quarter were not up to expectations.

Revenue growth at 24.5 per cent y-o-y during Q4 FY07 was lower compared with 26.3 per cent for FY07. Operating profit growth was also disappointing at 15.9 per cent in Q4 FY07 compared with 18.9 per cent for the full year.

The reason for the lower growth in operating profit during Q4 was lower segment profitability in cigarettes. Besides, other expenditure also went up 38 per cent on account of the launch of Bingo! snack foods and the launch of Silk Cut cigarettes.

Operating profit margin was lower by nearly 200 basis points y-o-y at 26.8 per cent in Q4 FY07. For the full year too, operating margins were 200 basis points lower at 32 per cent. In its cigarettes business, volume growth was good at 7 per cent during FY07.

Segment revenues in cigarettes improved by 14.3 per cent y-o-y during the quarter. However, margins in cigarettes were lower at 22.5 per cent in Q4 as compared with the year's margin of 24.7.

The runaway growth witnessed in hotels witnessed in the past few quarters slowed down as the base effect kicked in. Thus, segment profitability improved by 130 basis points in Q4 FY07 compared with 850 basis points a year ago.

Paper business margins improved by 170 basis points. The agri-business is still not making enough money and though the FMCG-others business grew 63 per cent, its loss too expanded.

Cigarette prices have been hiked by 20 per cent to pass on the incidence of VAT from this year, and analysts say this will have an impact on growth and margins.

Though ITC has tried to broadbase its businesses, cigarettes still contribute over 80 per cent of the profit before interest and tax. Hotels, the second key business in terms of profits, will not grow as rapidly this year as there are no new properties opening this year.

The FMCG-others is unlikely to break even in a hurry say analysts. ITC trades at about 20-21 times estimated FY08 earnings, and is unlikely to be an outperformer.