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Bharat Heavy Electricals 2QFY2013 performance highlights and results update

Contributed by Angel Broking

Bharat Heavy Electricals Ltd (BHEL) reported a disappointing performance on the top-line and bottom-line front in 2QFY2013. The top-line remained flat yoy at Rs.10,562cr, below our expectations. Order inflows continued to remain subdued at Rs.3,157cr taking the total order book to Rs.122,300 (down 24.1% yoy), thus implying an order book coverage of ~2.5x, which has been deteriorating sequentially over the quarters. The management has guided visibility of 10-13GW power sector orders. However, the headwinds in the power sector such as domestic fuel availability and land acquisition issues may delay these projects.

Key Highlights: The top-line remained flat yoy at Rs.10,562cr in spite of the power segment posting a healthy 14.9% yoy growth to Rs.8,958cr on account of decline in the industrial segment by 30.6% yoy to Rs.2,055cr (due to industrial slowdown). The EBITDA margin came in slightly lower than expected at 18.0% (lower by 79bp vs our expectation of 18.8%). Although, the margin of the power segment expanded by 287bp yoy to 19.7%, the margin of industrial segment contracted by 572bp yoy to 21.3%. The company benefited from an exceptional item to the tune of Rs.166cr at the PBT level due to a change in accounting policy. However, the net profit declined by 9.7% yoy to Rs.1,274cr.

Outlook and valuation: Given the strong competition (domestic as well as international), declining order flows and a weak capex cycle, we expect BHEL’s profit, margin and ROE to decline from the current levels. The stock trades at 9.1x and 10.3x on our FY2013E and FY2014E EPS estimates, respectively. We maintain our Neutral view on the stock.