For FY12, BHEL posted revenue of R49,500 crore (up 20%), adjusted Ebitda of R9700 crore (up 21%) and adjusted net profit of R6,900 crore (up 21%). The reported numbers are largely in line with the provisional numbers.
Adjusted Ebitda margin for FY12 was 20.3% (in line with our estimate of 20.2%), up 97 bps. While raw material costs increased 380 bps to 57.1%, the key surprise was a 140 bps decline in staff costs to 11.4%.
In absolute terms, staff costs grew just 1%, leading to meaningful operating leverage. The management stated that increases in staff costs will be contained, as a large part of the employee additions has been completed; also, retiring employees are being replaced by new joinees, leading to lower average wages. We model Ebitda margin of 18.4% in FY13 (down 190bp) and 15.7% in FY14 (down 270bp), driven by poor fixed cost absorption and higher RM costs.
Reported revenue growth for the power segment declined to just 2% in Q4FY12, and was 14% in FY12, down from 23% in FY11.
EBIT margin for the power segment declined 230 bps in FY12 to 21.6%. Industrial business EBIT margin expanded 630bp to 28.7%, which could have been driven by project-specific execution, and would be challenging to sustain.
Order inflows muted due to macro concerns: Order inflows declined 63% to R22100 crore in FY12. Order book dropped 18% ? the first annual decline since FY99 with a BTB (x) of 2.7x and given the execution period of 3.5- 4 years for power projects, the ratio is now uncomfortable and would constrain revenue growth, going forward.
We believe that Bhel would see decline in profits over the next 2-3 years due to stiff competition and pricing pressure.
We model revenue decline of 0.8% in FY13 and 5% in FY14, and Ebitda margin decline of 190 bp in FY13 and 270bp in FY14. We expect BHEL to report an EPS of R24.8 in FY13 (down 12.2%) and R19.8 in FY14 (down 20.2%). We maintain neutral rating.