BHEL Q2: Analysts expect margins to remain under pressure

State-run power equipment manufacturer BHEL is set to announce its results for the quarter ended September 2012 today. Analysts on an average expect subdued revenues due to sluggish order inflows.

Even margins are expected to remain under pressure due to increased pricing pressure and negative operating leverage, say analysts.

Profit after tax is likely to go up by 2.4 percent year-on-year to Rs 1,446 crore in the three months ended September 2012 and net sales are seen going up by 11.2 percent to Rs 11,448 crore from Rs 10,299 crore during the same period.

Earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to go up by 12.7 percent YoY to Rs 1,930 crore in the second quarter.

Analysts feel the operating profit margin will rise by 20 basis points to 16.9 percent versus 16.6 percent YoY.

Declining commodity prices and rupee depreciation are expected to improve BHEL’s competitive positioning.

Order inflows / order book

Analysts feel the order inflows are expected to remain sluggish this quarter.

Order inflows are likely to be approximately Rs 5,500 crore in the quarter. Total order book as on June 2012 stood at Rs 1.33 lakh crore.

Company has not announced any major orders this quarter, hence analysts expect order booking to remain subdued.

BTG Segment (BHEL’s largest contributor to revenues) has been severely hit due to a sharp slowdown in orders over the past two years, which is severely affecting the revenue traction.

Order inflow trend is inline with the fact that:

State electricity boards (SEBs) and private sector continue to delay their power generation plans.

Structural issues related to coal linkage, environment / forest clearance, land acquisition, imported coal prices and gas availability continue to remain unresolved

Industrial orders also remain weak

Corporate capex recovery has not yet commenced owing to lower demand and higher borrowing costs in the economy

Analysts feel the few positives announced during the quarter could improve structural factors for the company: SEB debt restructuring / coal price pooling / new standard bidding documents.

However, BHEL will continue to see two more years of poor performance. Things are expected to look up only from FY16, say analysts.

Management Guidance for FY13

BHEL has been targeting order inflow of 14-15 GW in FY13 as against 2.8 GW reported in FY12.

But brokerages are expecting only 7-8 GW in their estimates for the year given the challenging circumstances for the sector.

Investors should watch out for following factors:

Profitable execution of order backlog, outlook on order inflows

Stable operating margins, sector outlook / commentary