Buy Bharat Bijlee; target of Rs 1350: Emkay

“Bharat Bijlee reported 28% yoy growth in revenues to Rs 2.1 billion, in line with estimates. The EBITDA margins improved (due to low base) to 11.8% (our estimate - 12.2%) from 8.6% in Q3FY10 (+320bps yoy). The improvement is driven by (1) better transformers margins on low base and increased volumes and (2) ~ 20% volume growth in motors business driven by improvement in industrial capex. As a result of 320bps improvement in EBITDA margins, EBITDA and PAT grew by 76% and 92% yoy to Rs 244 million and Rs 142 million, in line.”

“For 9mFY11, BBL has reported earnings of Rs 62.2 per share (up 47% yoy). The Q4FY11E implied number stands at Rs 33.9 per share (growth of 14% yoy). This is 36% of overall FY11E earnings. Given the company’s history of almost 40%+ earnings in Q4, we maintain our FY11E and FY12E earnings with positive bias going into Q4FY11E. Though we are factoring in only 40bps improvement in EBITDA margins in FY12E, we continue to believe there is a higher scope of operational leverage coming into play and improve the margins.”

“BBL has a long-term investment in Siemens (2.8mn shares) and HDFC (0.10mn shares). After according 40% (earlier 50%) discount to CMP of the above securities, per share investment value for BBL works out to Rs265/Share. To value BBL, we have removed the above value (Rs 265 per share) from the CMP of Rs 943 per share. The stock is trading (ex-investment value) at “Bargain Hunt” valuations of 5.8xFY12E earnings, 3.0xFY12E EBITDA and 1.3xFY12E Book Value. On the back of (1) earnings CAGR of 26% in FY10-12E, (2) cheap valuations, (3) qtr by qtr improving numbers and (4) performance track record, we reiterate our ‘Buy’ ratings. Bharat Bijlee remains our top pick in the transformers pack. Maintain our target price of Rs 1350 per share (at 5xFY12E EBITDA),” says Emkay Global Financial Services research report.

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