Bharat Heavy Electricals Ltd’s (BHEL) Q4FY15 results came in ahead of consensus expectations after disappointing results in previous quarters. Revenues declined 16% year-on-year vs. consensus estimate of 21% y-o-y decline. Profit after tax and Ebitda (earnings before interest, taxes and depreciation) were 15% and 32% ahead of consensus estimates as Ebitda margins were 250bp above expectations. Implied order inflow of R102 bn in Q4FY15 and R308 bn in FY15, but remained weak.
What does the result mean? BHEL had earlier published weak provisional full year FY15 results. But the audited results were slightly better. Still, the underlying trend in revenue growth and margins remains very weak and still worse than our pre-provisional results expectations. Weak new order volumes and a shrinking order backlog remain areas of concern. Receivables are also elevated at R427 bn of which R170 bn is due for over a year, which could lead to write-offs.
Revenue fell 16% y-o-y to R127 bn. The decline was better than consensus estimates (-21%).
Power generation revenue declined 16% y-o-y. Industrial segment revenue was down 14%.
Ebitda margin dropped to 13.3% (down 500 bps y-o-y).
Staff cost of R9.2 bn was down 31% y-o-y, however management said that R1.9 bn of staff expenses were accounted as provisions. Adjusting for this, staff expenses were down 17% y-o-y as the company reduced headcount by 2,600 due to retirements.
Other expenses at R25.3 bn were up 10% y-o-y.
Due to the revenue and margin miss, Ebitda declined 40% y-o-y to R16.8 bn, but ahead of consensus estimates by 32%.
Other income of R0.16 bn was much lower than our estimate of R2.75 bn as Q4 was impacted by forex losses of R3 bn.
Due to lower operating performance, PAT at R8.88 bn was down 50%, but above estimates.
Order inflow remained tepid during the quarter at R102 bn and in FY15 at R308 bn.
The order book, as of 31 March 2015, stood at R1,011 bn, almost flat y-o-y. The breakdown of the order backlog is: Power (85%), Industrial (7%) and International (8%).
Takeaways from management call
The key reason for improved Ebitda margins was better cost management as materials consumption level remained at 58% despite a fall in revenues.
Staff cost mix improving as expensive retiring staff will be replaced by entry level recruits.
Targeted 100MW of solar PV ordering and has till now achieved 51MW of orders valued at R3.4 bn. Management hopes to receive a subsidy of 40% (R10 bn) on an investment of R27 bn.