 "BHEL: Stranded power projects to hit FY16 sales")
The quarterly performance of capital goods maker Bharat Heavy Electricals Ltd (BHEL) reiterates the common refrain that there’s little change on the ground. Revenue declined 16 per cent to Rs 12,690 crore.
Adjusted profit after tax fell 52 per cent year-on-year (y-o-y) to Rs 890 crore. While investors believe the outlook should continue to improve in the coming year, there is no clarity on when there will be a visible pick-up in order execution.
Stranded power projects continued to mar performance in the quarter. At Rs 25,000 crore, these account for 25 per cent of the order book. In FY15, the company won projects of 5.6 Gw and the management expects fresh ordering to increase to 20 Gw in FY16 for the industry. Additionally, newer areas like railways, defence and renewable energy could provide opportunities.
With coal power plants functioning at a plant load factor of 65 per cent, HDFC Securities believes ordering for power plants should be preceded by absorption of untied capacity (nearly 30 Gw). The brokerage does not expect more than 15 Gw of fresh orders annually for FY16/17 and believe management's expectations are very optimistic.
BHEL's order book remained flat compared to last year at Rs 1,01,018 crore.
Analysts believe the stock is trading at a valuation of 20 times its FY17 earnings. At the market price, they believe the market is assuming a 20 per cent growth in revenue and a high operating margin of 16 per cent, which would be difficult to achieve.
Higher competitive intensity and higher fixed costs would cap the earnings trajectory. During the quarter, the operating margin fell 490 basis points y-o-y to 13.3 per cent as high overhead costs remained unabsorbed. Operating margins in the power and industry segment declined by 620 basis points and 950 basis points y-o-y to 12.8 per cent and 9.7 per cent, respectively.
Most brokerages expect the stock to remain range-bound, as revenue growth will take some time to pick up. Emkay Global expects BHEL to report muted growth in revenue and profitability over the next four quarters, amidst execution slowdown and project delays.
Adjusted profit after tax fell 52 per cent year-on-year (y-o-y) to Rs 890 crore. While investors believe the outlook should continue to improve in the coming year, there is no clarity on when there will be a visible pick-up in order execution.
Stranded power projects continued to mar performance in the quarter. At Rs 25,000 crore, these account for 25 per cent of the order book. In FY15, the company won projects of 5.6 Gw and the management expects fresh ordering to increase to 20 Gw in FY16 for the industry. Additionally, newer areas like railways, defence and renewable energy could provide opportunities.
With coal power plants functioning at a plant load factor of 65 per cent, HDFC Securities believes ordering for power plants should be preceded by absorption of untied capacity (nearly 30 Gw). The brokerage does not expect more than 15 Gw of fresh orders annually for FY16/17 and believe management's expectations are very optimistic.
BHEL's order book remained flat compared to last year at Rs 1,01,018 crore.
Analysts believe the stock is trading at a valuation of 20 times its FY17 earnings. At the market price, they believe the market is assuming a 20 per cent growth in revenue and a high operating margin of 16 per cent, which would be difficult to achieve.
Higher competitive intensity and higher fixed costs would cap the earnings trajectory. During the quarter, the operating margin fell 490 basis points y-o-y to 13.3 per cent as high overhead costs remained unabsorbed. Operating margins in the power and industry segment declined by 620 basis points and 950 basis points y-o-y to 12.8 per cent and 9.7 per cent, respectively.
Most brokerages expect the stock to remain range-bound, as revenue growth will take some time to pick up. Emkay Global expects BHEL to report muted growth in revenue and profitability over the next four quarters, amidst execution slowdown and project delays.