BHEL - one-off quarter; result update Q3FY08; maintain Buy

BHEL (BHEL IN, INR 2,052, maintain Buy)

Bharat Heavy Electricals’ (BHEL’s) Q3FY08 results were below our and consensus’ estimates on account of lower than expected revenues. Revenues grew 14% Y-o-Y, to INR 49.6 bn. EBITDA grew 7% Y-o-Y, to INR 10 bn, on the back of slow execution of projects and increase in staff costs by 46% Y-o-Y. Higher other income (INR 2.6 bn, up 43% Y-o-Y) resulted in net profit growth of 16% Y-o-Y, to INR 7.7 bn. Strong order intake (INR 109 bn, up 91% Y-o-Y), coupled with softer execution in Q3FY08, led to record order backlog of INR 780 bn, up 67% Y-o-Y

One-off quarter: Revenue growth disappoints, higher other income saves earnings
Revenues grew tepidly at 14% Y-o-Y, to INR 49.6 bn, below the consensus’ estimates of ~ 20%. The power segment (~75% of Q3FY08 revenues) reported revenue growth of 19% Y-o-Y, to INR 42 bn, slowest over last ten quarters. Similarly, the industry segment reported lower revenue growth of 13% Y-o-Y, to INR 14 bn. EBITDA grew 7% Y-o-Y, to INR 10 bn, as margins dipped 130bps Y-o-Y. Margins disappointment was due to slower execution of projects, resulting in lower profit booking and increase in staff costs by 46% Y-o-Y, to INR 7.5 bn. Higher staff costs can be attributed to ~INR 800 mn wage provisioning and ~INR 2 bn performance-linked payment made during the quarter. Around 16% Y-o-Y growth in PAT, to INR 7.7 bn (despite 7% EBITDA growth), was due to higher other income (INR 2.6 bn, up 43% Y-o-Y).

Order backlog scales new high of INR 780 bn on back of strong order booking
Despite concerns on BHEL losing market share, it managed to record a strong order intake, evident from 80% Y-o-Y growth in its order booking (INR 365 bn) for 9mFY08. Around 67% Y-o-Y growth in order backlog, to INR 780 bn, was due to strong order booking (INR 109 bn, up 91% Y-o-Y) and slower execution of projects in Q3FY08.

Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on BHEL’s long term outlook, given that the demand for power equipment players is likely to remain strong over the next few years. To cater to capacity additions in the Eleventh Plan and maintain its market share above 60%, BHEL has planned an INR 32 bn capex outlay to augment its capacity by 5,000 MW. This will take the company’s overall capacity to 15,000 MW and increase its transformer capacity from 20,500 MVA to 38,500 MVA by December 2009. Healthy order bookings from both the segments are likely to result in revenue CAGR of 30% over FY08-10E, driving the earnings (EPS) to INR 84 and INR 112 for FY09E and FY10E respectively. At CMP of 2,052, the stock is trading at P/E of 24x and 18x FY09E and FY10E, respectively. We maintain our ‘BUY’ recommendation on the stock, given the company’s strong return ratios and augmented visibility of encouraging performance.