First look

Updated: Feb 11 2013, 08:51am hrs
Start of revenue decline now

Bearish on BHEL due to structural concerns: BHELs Q3FY13 results were below our as well as the streets estimates, led by weaker performance across the board. PAT (profit after tax) of R11.8 bn (down 18% y-y), albeit boosted by higher other income, missed our and the streets estimates by 11% and 13%, respectively. Moreover, Q3FY13 implied order inflows of Rs19 bn were sharply below our expectations of R40 bn. YTDFY13 order inflow now totals R107 bn, which is way behind our full year estimate of R326 bn.

What does the result mean

The numbers re-confirm our long-standing concerns on sales and margin decline that would lead to pressure on the balance sheet too. In fact, Q3FY13 marks the start of revenue decline for the company, in our view. While margins have also disappointed, we await managements con-call to see if other expenses were higher due to any one-off provisions. Lower order inflow during the quarter and the sharp fall in industrial segment margins further confirm our belief that BHEL would not be able to sufficiently compensate for the decline in the power segment through its diversifications attempts.

Key numbers

* Revenue at R102 bn noted its first decline y-y in the last 10 years in any quarter. The revenue missed our and consensus estimates by 4% and 7%, respectively.

* Ebitda margin at 16.0% was well below our as well as consensus estimates of 17.9% and 18.0%, respectively. Margins contracted by 310bps y-y and 200bps q-q. The margin decline was led by a rise in other expenses.

* Weak topline and lower margins resulted in a higher miss at Ebitda level. Ebitda at R16.3 bn came in 14% and 17% lower than our and consensus estimates.

* Implied order inflow in Q3FY13 remained weak at R19 bn and was lower than our as well as the streets expectations. The total order inflow for 9MFY13 now stands at R107 bn, which is behind our full year estimate of R326 bn.

* The order book, as of December 30, 2012 stands at R1,137 bn, down 22% y-y.

Management hopeful of ending FY13 with R300 bn order inflows and build on it in FY14

* On the back of weak Q3FY13 results , BHEL management in the post-results conference call mentioned that it believes order inflow has bottomed and that it is witnessing a reasonable tender pipeline in the offing over the medium term.

* Specifically, the company talked of having already received R50 bn in orders over and above its 9MFY13 inflow of R107 bn. By Mar 13 end, it expects to receive an additional R150 bn worth of orders.

* For FY14, the company mentioned that there exists 7GW of tender pipeline from various central and state utilities in India. On the back of this pipeline and helped by its diversification into newer segments (such as railways, defence and renewable energy), the company expects to drive order inflow growth in FY14.

* Within these, management appeared more optimistic about orders from the railway segment due to large investments planned in India for improving railway infrastructure. BHEL mentioned that it had already started bidding for orders in the segment together with its partner Hitachi.

* In 10MFY13, the company has received orders worth R150 bn, and management expects to end the year with an order inflow of R300 bn for FY13.

* The company mentioned that margin decline witnessed during the quarter was led by a rise in other expenses, which was on back of higher provisioning for doubtful debts/contractual obligations and liquidated damages.

We remain bearish on BHEL owing to continued structural concerns in the sector such as fuel supply shortage, land and environmental clearances, over-ordering of projects that could lead to project cancellations and excess supply of equipment manufacturing capacity in the country.

While the company talked of a reasonable order pipeline for the next 15 months, we note that our estimates already build in much higher numbers and still suggest that revenues and margins are set for a multi-year decline for the company. Accordingly, we retain our Reduce rating with a target price of R174 on BHEL.

Nomura