Despite a healthy March 2011 quarter performance (post adjustment for policy changes), the markets gave thumbs down to BHEL’s divestment proposal. The company’s in principle approval to the follow-on public offer (FPO) was largely responsible for the stock plunging nearly 7 per cent on Monday—though it recovered marginally by 0.7 per cent on Tuesday to close at Rs 1,949.65. While the company is expected to report healthy topline growth of about 20 per cent over the next two years, the approaching FPO is expected to keep the stock under pressure in the near-term, feel analysts. Besides, the company's ability to sustain order inflow and margins will also be monitored.
POLICY CHANGES BOOST PERFORMANCE
Bharat Heavy Electricals’ (BHEL) March 2011 quarter results look impressive, but were boosted by change in accounting policy to comply IFRS standards say analysts. The company changed its accounting policy pertaining to provision of warranties, leave liabilities for employees to actuarial basis valuation from accrual basis (leading to lower employee provisions) and depreciation on equipment. Adjusted for these changes, profit before tax (PBT) for 2010-11 would have been lower by about 7 per cent to Rs 8,400 crore as against Rs 9,000 crore reported (flash results), estimate analysts at Prabhudas Lilladher.
Nevertheless, growth in adjusted PBT is still healthy at 27.5 per cent for 2010-11. The business performance was led by strong execution of its highest ever order book position of Rs 165,000 crore (estimated as on March 31, 2011) — continued growth of 30 per cent witnessed by power division (79 per cent of total revenues) and industry division’s growth of about 17 per cent (almost doubling compared to 2009-10).
| GOOD SHOW | ||
| In Rs crore | Q4FY11 | FY11 |
| Op. revenues | 18,380 | 42,496 |
| Y-o-y chg (%) | 32.0 | 27.0 |
| Op. profit | 4,293 | 8,963 |
| Y-o-y chg (%) | 50.0 | 43.0 |
| Net profit | 2,798 | 6,011 |
| Y-o-y chg (%) | 47.0 | 39.0 |
| OPM (%) | 23.4 | 21.1 |
| Chg (bps) | 276 | 245 |
| Note: bps is basis points (1% = 100 bps) Results on a standalone basis; Source: Company | ||
NEGATIVE SURPRISE
While the Board’s approval for a stock split of 1:5 is positive, the divestment of 5 per cent stake in BHEL by the government is viewed as a negative. Analysts believe this will put further pressure on the stock that has been a huge underperformer over the last one year. If the past is anything to go by, the government is likely to give a healthy discount to BHEL’s current market price in order to get good response from investors. Not surprisingly, investors dumped the stock after declaration of results on Monday.
Also, analysts say the timing of divestment is not good given that BHEL’s outlook is mired with concerns of competition and its impact on order inflows. This was already evident in the March 2011 quarter. Though the company met a full year order inflow guidance of Rs 60,000 crore and recorded the highest ever order inflow of Rs 23,500 crore, the same was up just 6 per cent year-on-year. While the high base of 2010 could be partly responsible for this, the growth in order book has slipped further to touch a four-year low of 15 per cent. Notably, the company has guided for a mere growth of 10 per cent in order intake for 2011-12.
Despite robust revenue visibility (4 times 2010-11 revenues), the company’s ability to improve margins in tough market conditions and efforts of foraying into non-power businesses, analysts remain worried about the estimated overcapacity after 2012-13. Delay in commissioning of power generation capacities due to ongoing coal shortage and independent participation by the proposed 50:50 joint venture between Alstom and Shanghai Electric in India are other concerns.
