Bharat Heavy Electricals Ltd's power push

State-owned engineering and manufacturing company Bharat Heavy Electricals Ltd (Bhel) reported better-than-expected numbers for the quarter ended June.

Net profit increased 41.88% year on year to Rs667.65 crore on
the back of strong margin improvement and higher sales in its mainstay power segment.

However, net revenue rose 15.8% to Rs6,479.69 crore. This was a tad slow considering Bhel’s strong order book position of Rs1,44,000 crore at the start of the quarter.

Revenues from the power division increased 18.19% year on year to Rs5,399.88 crore and contributed nearly 86% to the total profit before tax, led by a pick-up in power capacity addition by government and private players.

The industrial projects division saw revenues increase slower, at 10.8%, to Rs1,476.31 crore.

Earnings before interest, depreciation, tax and amortisation (Ebitda) margins improved by a whopping 379 basis points (100 basis points make a percentage point) to 13.02% in Q1 FY11, led by lower cost of raw material and higher operating margins in the power segment (19.81%).

The company has been focusing on reduction of raw material costs and this led to expenditure on raw materials as a percentage of net sales decreasing by 317 bps year on year to 60.72%, though employee costs as percentage of net sales increased 75 bps to 20.65% despite Bhel having made additional provisions for wage increases during last year.

Ebidta thus grew 63.44% year on year to Rs843.67 crore.
The company, which has increased its operational capacity to manufacture equipments generating combined power of 15 gw, saw its depreciation expenses increase 32% to Rs126.89 crore. Also, other income, at Rs163.45 crore, was 28% lower year on year. This led to net profits growing at around 42% in spite of strong Ebidta growth.

During the quarter, the company received new orders worth Rs10,800 crore, with major ones from Karnataka Power Corporation (Rs6,300 crore) and Dainak Bhaskar Power (Rs2,665 crore). However, the new order inflows were 15% less than those received during the same quarter last year at Rs12,700 crore. At the end of June quarter, Bhel’s order book position was at Rs1,48,000 crore, which provides good revenue visibility for the coming 2-3 years.

The market cheered the result, sending up Bhel’s stock 1.73% to close the day at Rs2,460.45 on the Bombay Stock Exchange. At the current market price, the stock is trading at nearly 22 times its expected FY11 earnings per share (EPS) and 18 times its expected FY12 EPS. Analysts remain positive on the stock with decent returns expected over the medium-to-long term.