Lighting up on power reforms

Updated: Nov 13 2005, 05:30am hrs
Indian power industry has a long way to go so as to maintain the consistent growth of 7-8% GDP. Against this, the power sector is required to grow by 8-9%. This has led to a upswing in the demand for power transformers, as it needs simultaneous investment in the power generation capacity and the transmission and distribution sector.

Bharat Bijlee Ltd (BBL), one of the leaders in the electrical engineering industry, seems all geared up to benefit from this upward trend. The company manufactures and markets a wide range of motors and power and distribution transformers.

Financials

During the quarter ended Sep 30, 2005 the company registered a decrease of 13% in sales to touch Rs 61.9 crore while the net profit moved up by 101.93% to touch Rs 7.31 crore. While profit after tax (PAT) jumped by 4%, substantial jump is seen in other income and extraordinary income figures. Other income showed a substantial jump of 135% during the same period to touch Rs 87 lakh and the extraordinary income showed an increase of 897% to touch Rs 3.1 crore.

However, the company showed an impressive result during the first quarter as net sales showed an increase of 29.35% to touch Rs 58.03 crore. The stock is also moving in tandem with the market mood and has given a return of 171% against the benchmark index, Sensex return of 40%.

BBL has also recently divested its elevator business to Tiger elevators for Rs 33 crore. The elevator business had negative margins and with the divestment the company's profits has increased significantly.

During FY 2005 sales moved up by 20.3% to touch Rs 245 crore while the PAT jumped by 155% to touch Rs 18.6 crore. The company has also showed a strong order book in the last few quarters. The order book obtained for the four months ended July 2005 was at Rs 111.78 crore which has been augmented by 15% as it was Rs 97.17 crore in the last year.

The company holds 2.82 lakh shares of Siemens which works out to Rs 68 crore. Against this the entire market capitalisation of BBL works out to Rs 275 crore. In other words, if one buys out BBL atRs 275 crore, one gets Rs 68 crore worth of investment in Siemens free of cost. The book value as a parameter is not in a position to catch these hidden asset of the company.

Demand drivers

As per the planned estimates the Indian power sector will witness substantial capacity addition and modernisation which will boost the demand for transformers and other power equipments.

Even Indian industries have planned a huge capex, which will create a favourable demand scenario for its motor business. Also, the strategy of concentrating on custom made, higher frame-size orders would enable it to further improve both product mix and as well as the market share.

Moreover, Rajeev Gandhi Grameen Vidyutikaran Yojna initiated in the budget with an aim to see one distributor transformer installed in every village has further boosted the demand. Further, 37% of the company revenue comes from motor business. These motors are witnessing strong demand from sponge iron, textiles and pump sectors. Besides this state electricity boards are the main consumers for company's products.

Concerns

There has been an increase in core rolled grain oriented (CRGO) steel and copper and this has risen the raw material cost of the company. However, unlike the past recent stock split has improved the liquidity position of the company.

Valuation

At current market price of Rs 485 Bharat Bijlee is quoting at a P/E ratio of 9.31. The company's earnings are also expected to grow at a CAGR of 27% over the next two years.

While taking into consideration the sharp rise in CRGO price the company is expecting its operating profit to grow by 26% in FY06. It's net profit are expected to grow by 21% and 33% in the FY06 and FY07 respectively.