Angel Securities on BHEL

BHEL reported a strong performance in this quarter with a 35.7 per cent year-on-year growth in its bottom line to Rs 1,072.6 crore, which was in line with estimates. Though the company disappointed on the topline front and clocked a mere 17.9 per cent growth to Rs 7,100 crore on the back of slower-than-expected execution, it made up for this with a higher-than-expected expansion in operating margins. BHEL reported a sharp rise in the EBITDA margins by 323 basis points to 20.2 per cent, which was above expectations. This was primarily driven by lower raw material costs, which reduced by 269 basis points to 55.5 per cent of net sales, on account of benefits of lower commodity prices. The substantial reduction in other expenses also aided margin expansion during the quarter, leading to higher net profit growth. The Indian power equipment market is in the midst of a structural change, with intensifying competition, both from the domestic and overseas players. Additionally, the changing mix of the power projects in the 12th Plan, towards relatively weaker areas of BHEL, would offer better opportunities for competitors to eat into BHEL’s pie. At Rs 2,297, the stock is quoting at 21.2 times and 17.8 times 2010-11and 2011-12 estimated EPS, respectively. Given the structural long-term concerns, we maintain our neutral view on the stock