Motilal Oswal neutral on BHEL

Motilal Oswal has maintained neutral rating on BHEL with a target of Rs 198, in its May 24, 2012 research report.

“For FY12, BHEL posted revenue of INR495b (up 20%), adjusted EBITDA of INR97b (up 21%) and adjusted net profit of INR69b (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 97bp. While raw material costs increased 380bp to 57.1%, the key surprise was a 140bp 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 4QFY12, and was 14% in FY12, down from 23% in FY11. EBIT margin for the Power segment declined 230bp 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 declined 63% to INR221b 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 declining profitability 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 190bp in FY13 and 270bp in FY14. We expect BHEL to report an EPS of INR24.8 in FY13 (down 12.2%) and INR19.8 in FY14 (down 20.2%). Maintain Neutral,” says Motilal Oswal research report. 

Institutional holding more than 40% in Indian cos

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