Post on 16-Mar-2018
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BHEL delivered a better than expected top‐line on the back of strong execution in both utilities and industry segments. Execution during Q1FY13 was 2.2GW vs 1.3GW in Q1FY12. The company reported an improved OI of INR55.9bn albeit on a lower base of INR25bn last year. The management reiterated FY13E guidance of INR600bn OI with a higher focus on EPC based projects, transportation (locomotives) and T&D. We maintain HOLD.
Execution a positive surprise; higher opex dents OPM Strong execution during the quarter came in as a positive surprise, both for us as well the Street. This was led by a robust volume growth in utility and industry space. For Q1FY13, BHEL delivered a 73% YoY increase in execution on MW basis to 2200MW. EBIDTA margins dropped 90bps YoY, led by higher provisioning (LD +Contractual obligations) of INR2.14bn (up 48 % YoY) and higher freight cost (up by INR390mn).
Management reiterates FY13E guidance on OI, revenues BHEL management has reiterated its FY13E order intake guidance at INR600bn, implying an order intake of INR544bn vs INR195bn during 9MFY12 which we believe is very aggressive. The management targets to incrementally focus on EPC projects as against its historical focus on BTG projects. We remain confident on BHEL’s sales guidance of INR500bn (MoU signed on excellent target basis) given the status on current delivery time‐lines. New intake for Q1FY13 stands at INR56bn (up 126% YoY on low base) driven by project awards from the Govt space (NTPC, RRVUNL etc).
Outlook and valuations: Sticky concerns; maintain ‘HOLD’ While BHEL has delivered a commendable execution performance during Q1FY13 despite broader industry concerns, we believe that declining revenue visibility and rising competitive scenario among domestic players remain a key issue, especially with the scarcity of a project pipeline in the private space. We do not see any major uptick in the domestic BTG industry in the near to medium term (next two years) given the slow traction in current projects (WIP), sustaining issues like coal and land availability, etc. We do not expect any major upside on account of non‐BTG ordering in the near term. Maintain HOLD/SP with a TP of INR 204/sh. The stock currently trades at a P/E of 8.3x & 8.4x its FY13E & FY14E earnings respectively.
RESULT UPDATE
BHARAT HEAVY ELECTRICALSBeats estimates, but prospects remain weak
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector Low
Sector Relative to Market Equalweight
MARKET DATA (R: BHEL.BO, B: BHEL IN)
CMP : INR 212
Target Price : INR 204
52‐week range (INR) : 405 / 197
Share in issue (mn) : 2,447.6
M cap (INR bn/USD mn) : 519/ 9,299
Avg. Daily Vol.BSE/NSE(‘000) : 5,412.2
SHARE HOLDING PATTERN (%)
Current Q4FY12 Q3FY12
Promoters %
67.7 67.7 67.7
MF's, FI's & BK’s 13.1 12.8 13.5
FII's 12.9 13.5 12.2
others 6.2 6.0 6.5 * Promoters pledged share (% of share in issue)
: NIL
PRICE PERFORMANCE (%)
Stock Nifty
EW Capital Goods Index
1 month (3.3) (1.5) 5.0
3 months (8.4) (2.8) (13.1)
12 months (44.3) (9.5) (31.4)
Amit Mahawar +91 22 4040 7451 amit.mahawar@edelcap.com Rahul Gajare +91 22 4063 5561 rahul.gajare@edelcap.com Swarnim Maheshwari +91 22 4040 7418 swarnim.maheshwari@edelcap.com
India Equity Research| Engineering and Capital Goods
July 26, 2012
Financials
Year to March Q1FY13 Q1FY12 % change Q4FY12 % change FY12 FY13E FY14E
Net rev. (INR mn) 84,390 72,715 16.1 195,889 (56.9) 479,789 518,032 528,108
EBITDA (INR mn) 12,022 11,132 8.0 49,372 (75.7) 98,880 93,780 93,583
Core profit (INR mn) 9,209 8,155 12.9 33,798 (72.8) 70,400 62,238 61,584
Diluted EPS (INR) 3.8 3.3 12.9 13.8 (72.8) 28.8 25.4 25.2
Diluted P/E (x) 7.4 8.3 8.4
EV/EBITDA (x) 4.5 4.9 5.0
ROAE (%) 30.9 22.3 18.8
Engineering and Capital Goods
2 Edelweiss Securities Limited
Key notes from Q1FY13 Conference call: • BHEL’s stand on import duty benefit: The management expects the recent import duty
announcement to benefit the company by ~4%‐5%. It forsees the recent Cabinet action regarding duty as a start to the positive government action for the power sector and remains hopeful of further decisions.
• Share of EPC projects to go up: Historically, BHEL has been targeting EPC projects on a selective basis with more than 80 % of its total power projects coming in from main plant equipment orders (BTG). Given the competitive scenario in the domestic arena, the management will incrementally target EPC based projects while continuing to outsource BoP equipments (like CHP, AHP, DM Plant etc) from external vendors.
• Sup‐critical imports at 20%, super‐critical at 25%‐30%: BHEL management indicated that for a standard 500MW unit rating (sub‐critical) project, currently it imports around 20% of the total RM which for a 660MW (super‐critical) is higher at around 25%‐30%. The management believes that its overall positioning and competiveness vs other domestic players (who import a higher proportion currently) remains intact.
• FY13E apex at INR10bn; transportation and T&D focus: BHEL is increasing its overall Locomotive manufacturing capacity by 50% over the next one year to 75 Locos/annum (upto 6000 HP) at its Jhansi plant. The company is further developing GIS capability in JV with Toshiba (Japan) to cater to domestic GIS market which is witnessing a decent growth.
• Strong potential for R&M activity with 30 GW plants with > 25 yrs age: BHEL foresees a strong traction in up‐rating and renovation & modernization (R&M) with more than 30GW of installed thermal capacities having an age of more than 25 years.
Chart 1: Order inflow movement – Improvement on a low base
Source: Company, Edelweiss research
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Bharat Heavy Electricals
3 Edelweiss Securities Limited
Chart 2: Order backlog and visibility – continues to decline
Chart 3: Revenue and revenue growth movement
Chart 4: EBITDA and EBITDA margin movement ‐ Declined due to higher LD charges
Source: Company, Edelweiss research
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Engineering and Capital Goods
4 Edelweiss Securities Limited
Chart 5: One year forward PE band – Trading at 50% below its avg. valuation
Source: Company, Edelweiss research
Table 1: Segmental snapshot
Source: Company, Edelweiss research
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BHEL 1 year forward P/E
Average P/E at 18.1x (FY05‐FY12)
Year to March Q1FY13 Q1FY12 % change FY12 FY11 % changeRevenue (INR mn)Power 67,720 57,803 17.2 378,629 331,654 14.2Industry 19,717 16,529 19.3 116,589 102,145 14.1Total revenue 87,436 74,332 17.6 495,217 433,799 14.2Segment revenue mix (%)Power 77.5 77.8 76.5 76.5Industry 22.5 22.2 23.5 23.5EBIT (INR mn)Power 12,064 9,518 26.7 81,848 79,350 3.1Industry 4,134 3,733 10.8 33,424 22,823 46.5Total EBIT 16,198 13,251 22.2 115,272 102,173 12.8EBIT margin (%)Power 17.8 16.5 135 bps 21.6 23.9 ‐231 bpsIndustry 21.0 22.6 ‐162 bps 28.7 22.3 632 bpsEBIT mix (%)Power 74.5 71.8 71.0 77.7 Industry 25.5 28.2 29.0 22.3
Bharat Heavy Electricals
5 Edelweiss Securities Limited
Financial snapshot (INR mn) Year to March Q1FY13 Q1FY12 % Change Q4FY12 % Change FY12 FY13E FY14E Net revenues 84,390 72,715 16.1 195,889 (56.9) 479,789 518,032 528,108 Staff costs 13,950 13,010 7.2 14,781 (5.6) 54,658 57,965 61,472 Direct costs 48,578 41,500 17.1 111,350 (56.4) 274,167 303,994 309,158 Other operating expenses 9,840 7,073 39.1 20,387 (51.7) 52,084 62,293 63,895 Total expenditure 72,368 61,582 17.5 146,517 (50.6) 380,909 424,252 434,524 EBITDA 12,022 11,132 8.0 49,372 (75.7) 98,880 93,780 93,583 Depreciation 2,284 1,709 33.6 2,541 (10.1) 8,000 9,478 10,378 EBIT 9,738 9,423 3.3 46,831 (79.2) 90,880 84,302 83,205 Other income 3,663 2,487 47.3 3,989 (8.2) 12,656 9,136 9,409 Interest 55 88 (37.3) 183 (69.9) 513 545 697 Profit before tax 13,346 11,822 12.9 50,637 (73.6) 103,023 92,893 91,917 Tax 4,137 3,667 12.8 16,838 (75.4) 32,623 30,655 30,333 Reported net profit 9,209 8,155 12.9 33,798 (72.8) 70,400 62,238 61,584 Adjusted net profit 9,209 8,155 12.9 33,798 (72.8) 70,400 62,238 61,584 Equity capital 4,895 4,895 4,895 4,895 4,895 4,895 No. of shares (mn) 2,448 2,448 2,448 2,448 2,448 2,448 Diluted EPS (INR) 3.8 3.3 12.9 13.8 (72.8) 28.8 25.4 25.2 As % of net revenues Direct costs 57.6 57.1 56.8 57.1 58.7 58.5 Employee cost 16.5 17.9 7.5 11.4 11.2 11.6 Other operating expenses 11.7 9.7 10.4 10.9 12.0 12.1 EBITDA 14.2 15.3 25.2 20.6 18.1 17.7 Adjusted net profit 10.9 11.2 17.3 14.7 12.0 11.7 Tax rate 31.0 31.0 33.3 31.7 33.0 33.0
Engineering and Capital Goods
6 Edelweiss Securities Limited
Company Description BHEL is the largest heavy engineering and manufacturing enterprise in India in the energy‐related/infrastructure sector. It manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian economy viz., power generation & transmission, industry, transportation, telecommunications, and renewable energy. The company has a wide network with 14 manufacturing divisions, four power sector regional centers, over 100 project sites, eight service centers, and 18 regional offices across the country. An extensive network enables the company promptly serve its customers and provide them with suitable products, systems, and services. The company derives major revenues from power equipment manufacturing including boiler, turbine generators, major auxiliaries etc with more than 65 % of the total component manufacturing in house.
Investment Theme Domestic power equipment market is expected to see a total ordering of ~14‐15 GW per annum over FY12E‐FY14E which coupled with an increasing BTG capacity planned hints at a huge overcapacity and pricing pressures. With most of the 12th Plan orders already placed, we do not expect any great addition to the current BTG pipeline and thus remain negative on the sector profitability over the next 2‐3 years. While BHEL will be the largest capacity BTG Company in the country with a total installed capacity of 20 GW per annum by March, 2012E, we see a huge risk of under utilization for the company owing to limited order pipeline. This could lead to a sharp dip in order inflows over the next two years, ultimately slowing the revenue growth for BHEL.
Key Risks • Sustained material improvement in coal availability and land clearance issues in the
country could change the outlook for the power sector, leading to a substantial improvement in BTG demand and its current over capacity.
• Any major inorganic expansion by BHEL in the non‐thermal space poses a key risk to our call.
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Bharat Heavy Electricals
Financial Statements
Key Assumptions Year to March FY10 FY11 FY12 FY13E FY14EMacro ‐ GDP(Y‐o‐Y %) 8.4 8.4 6.5 6.4 7.0 Inflation (Avg) 3.6 9.9 8.8 7.0 6.0 Repo rate (exit rate) 5.0 6.8 8.5 7.3 6.8 USD/INR (Avg) 47.4 45.6 47.9 53.5 50.0 Company ‐ Order intake ( In Mws) 16,489.0 15,071.0 3,320.0 8,501.0 8,500.0 Order intake (INR bn) 590 601 222 286 301 Order backlog (INR bn) 1,417 1,640 1,367 1,122 882 Revenue visibility (x) 4.3 3.8 2.9 2.2 1.7 Headcount addition (% change) 1.0 1.0 5.7 1.0 1.0
Income statement (INR mn) Year to March FY10 FY11 FY12 FY13E FY14EIncome from operations 333,549 422,466 479,789 518,032 528,108Direct costs 186,214 256,176 274,167 303,994 309,158 Employee costs 64,458 53,967 54,658 57,965 61,472 Other Expenses 24,884 27,151 52,084 62,293 63,895 Total operating expenses 275,555 337,294 380,909 424,252 434,524 EBITDA 57,994 85,172 98,880 93,780 93,583 Depreciation & Amortization 3,371 4,756 8,000 9,478 10,378 EBIT 54,622 80,416 90,880 84,302 83,205 Other income 11,549 10,206 12,656 9,136 9,409 Interest expenses 335 547 513 545 697 Profit before tax 65,836 90,075 103,023 92,893 91,917 Provision for tax 22,803 29,945 32,623 30,655 30,333 Net profit 43,033 60,130 70,400 62,238 61,584 Extraordinary income/ (loss) 73 ‐ ‐ ‐ ‐ Profit After Tax 43,106 60,130 70,400 62,238 61,584 Shares outstanding (mn) 2,448 2,448 2,448 2,448 2,448 Diluted EPS (INR) 17.6 24.6 28.8 25.4 25.2 Dividend payout (%) 31.0 23.9 12.8 18.4 22.6
Common size metrics ‐ as % of net revenues Year to March FY10 FY11 FY12 FY13E FY14EOperating expenses 82.6 79.8 79.4 81.9 82.3EBITDA margins 17.4 20.2 20.6 18.1 17.7 EBIT margins 16.4 19.0 18.9 16.3 15.8 Net profit margins 12.9 14.2 14.7 12.0 11.7
Growth ratios (%) Year to March FY10 FY11 FY12 FY13E FY14ERev. growth 24.8 26.7 13.6 8.0 1.9EBITDA 39.5 46.9 16.1 (5.2) (0.2) Net profit 37.6 39.7 17.1 (11.6) (1.1)
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Engineering and Capital Goods
Balance sheet (INR mn) As on 31st March FY10 FY11 FY12 FY13E FY14EEquity capital 4,895 4,895 4,895 4,895 4,895Reserves & surplus 154,278 196,643 248,837 299,621 347,303 Shareholders funds 159,173 201,538 253,732 304,516 352,198 Borrowings 1,278 1,634 1,234 1,634 2,034 Sources of funds 160,451 203,172 254,966 306,150 354,232Gross block 65,801 80,497 93,308 105,308 115,308Depreciation 41,647 46,488 54,486 63,966 74,344 Net block 24,154 34,009 38,822 41,342 40,965 Capital work in progress 15,296 17,622 17,622 17,622 17,622 Total fixed assets 39,450 51,631 56,444 58,964 58,586 Investments 798 4,392 4,617 4,617 4,617 Inventories 92,355 109,630 134,445 145,750 155,849 Sundry debtors 206,887 273,546 358,448 385,354 421,634 Cash and equivalents 97,901 96,302 66,720 53,740 52,270 Loans and advances 32,205 35,469 31,624 36,706 40,860 Total current assets 429,348 514,947 591,237 621,551 670,614 Sundry creditors and others 280,237 313,465 336,380 318,031 318,634 Provisions 44,180 75,968 76,414 76,414 76,414 Total current liabilities & provisions 324,417 389,433 412,794 394,445 395,048 Net current assets 104,931 125,514 178,443 227,106 275,566 Net Deferred tax 15,272 21,636 15,462 15,462 15,462 Uses of funds 160,451 203,172 254,966 306,150 354,232Book value per share (INR) 65.0 82.3 103.7 124.4 143.9
Free cash flow (INR mn) Year to March FY10 FY11 FY12E FY13E FY14ENet profit 46,872 60,130 70,400 62,238 61,584Depreciation 4,582 4,756 8,000 9,478 10,378 Deferred tax 3,131 (6,363) (218) ‐ ‐ Others (11,307) (1,008) (2,295) 545 697 Gross cash flow 43,278 57,515 75,887 72,261 72,659 Less: Changes in WC 27,428 30,929 82,510 61,642 49,930 Operating cash flow 15,850 26,586 (6,624) 10,619 22,729 Less: Capex 17,137 17,238 12,811 12,000 10,000 Free cash flow (1,287) 9,348 (19,435) (1,381) 12,729
Cash flow metrics Year to March FY10 FY11 FY12E FY13E FY14EOperating cash flow 15,850 26,586 (6,624) 10,619 22,729Investing cash flow (9,666) (13,428) (13,036) (12,000) (10,000) Financing cash flow (11,429) (14,757) (9,919) (11,600) (14,199) Net cash flow (5,246) (1,599) (29,579) (12,981) (1,470) Capex (17,137) (17,238) (12,811) (12,000) (10,000) Dividends paid (8,730) (10,879) (14,563) (9,007) (11,455)
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Bharat Heavy Electricals
Source: Edelweiss research
Peer comparision valuation
Name of the companies CMP Market cap (USD mn)
2013E 2014E 2013E 2014E 2013E 2014E
L&T 1319 14,561.4 16.5 14.2 2.5 2.2 16.3 16.6BGR Energy 275 358.0 8.8 7.5 1.5 1.3 18.7 19.0Thermax 503 1,080 11.0 10.8 3.2 2.8 20.8 19.9BHEL 212 9,365 8.3 8.4 1.7 1.5 22.3 18.8
PE (x) P/BV (x) ROE (%)
Profitability & efficiency ratios Year to March FY10 FY11 FY12E FY13E FY14EROAE (%) 29.8 33.3 30.9 22.3 18.8ROACE (%) 37.7 44.9 40.5 30.6 25.6 Inventory day 167 144 162 168 178 Debtors days 201 208 240 262 279 Payable days 504 423 433 393 376 Cash conversion cycle (days) (136) (72) (30) 37 81 Current ratio 1.3 1.3 1.4 1.6 1.7 Interest coverage 163.1 146.9 177.2 154.7 119.4
Operating ratios Year to March FY10 FY11 FY12E FY13E FY14ETotal asset turnover 2.3 2.3 2.1 1.8 1.6Fixed asset turnover 17.2 14.5 13.2 12.9 12.8 Equity turnover 2.3 2.3 2.1 1.9 1.6
Du pont analysis Year to March FY10 FY11 FY12E FY13E FY14ENP margin (%) 12.9 14.2 14.7 12.0 11.7Total assets turnover 2.3 2.3 2.1 1.8 1.6 Leverage multiplier 1.0 1.0 1.0 1.0 1.0 ROAE (%) 29.8 33.3 30.9 22.3 18.8
Valuation parameters Year to March FY10 FY11 FY12E FY13E FY14EDiluted EPS (INR) 17.6 24.6 28.8 25.4 25.2Y‐o‐Y growth (%) 37.6 39.7 17.1 (11.6) (1.1) CEPS (INR) 20.2 23.9 31.9 29.3 29.4 Diluted PE (x) 12.1 8.6 7.4 8.3 8.4 Price/BV (x) 3.3 2.6 2.0 1.7 1.5 EV/Sales (x) 1.3 1.0 0.9 0.9 0.9 EV/EBITDA (x) 7.3 4.9 4.5 4.9 5.0
10 Edelweiss Securities Limited
Company Absolute
reco
Relative
reco
Relative
risk
Company Absolute
reco
Relative
reco
Relative
Risk
ABB India REDUCE SU L Bajaj Electricals BUY SO M
BGR Energy Systems HOLD SP M Bharat Electronics BUY SO H
Bharat Heavy Electricals HOLD SP L Crompton Greaves BUY SO M
Cummins India HOLD SP L Havells India BUY SO M
Jyoti Structures HOLD SP M Kalpataru Power Transmission HOLD SP M
KEC International HOLD SP M Larsen & Toubro BUY SO M
Siemens BUY SO L Sterlite Technologies HOLD SP H
Techno Electric & Engineering BUY SO M Thermax HOLD SP L
Voltamp Transformers REDUCE SU M Voltas HOLD SP L
RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
11 Edelweiss Securities Limited
Bharat Heavy Electricals
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: research@edelcap.com
Vikas Khemani Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206
Nischal Maheshwari Co‐Head Institutional Equities & Head Research nischal.maheshwari@edelcap.com +91 22 4063 5476
Nirav Sheth Head Sales nirav.sheth@edelcap.com +91 22 4040 7499
Coverage group(s) of stocks by primary analyst(s): Engineering and Capital Goods ABB India, BGR Energy Systems, Bharat Electronics, Bharat Heavy Electricals, Bajaj Electricals, Crompton Greaves, Havells India, Jyoti Structures, KEC International, Cummins India, Kalpataru Power Transmission, Larsen & Toubro, Siemens, Sterlite Technologies, Techno Electric & Engineering, Thermax, Voltamp Transformers, Voltas
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 104 60 18 183* 1 stocks under review
Market Cap (INR) 114 58 11
Date Company Title Price (INR) Recos
Recent Research
23‐Jul‐12 Larsen and Toubro
Good show in tough times; Result Update
1,378 Buy
20‐Jul‐12 Crompton Greaves
Weak performance, reasonable recovery prospects; Result Update
130 Buy
16‐Jul‐12 Engineering and Capital
Goods
Expectations galore; Monthly Update
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
12 Edelweiss Securities Limited
Engineering and Capital Goods
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