Stock Review: BHEL

Registering a modest 10% year-on-year growth in the topline for the first quarter FY12, Bhel's revenue growth has fallen way short of expectations, despite a healthy order book. The YoY sales growth for Q1 FY12 is, in fact, the lowest since Q1 FY05. Logistical issues arebeing cited as one of the key reasons for this shortfall in revenue.

The closure of JNPT for facility upgradation for more than a month, resulting in equipment export and import delays, appears to have impacted the Q1 revenues by about . 600-700 crore. Apart from revenue growth, a slump in fresh order inflows during the quarter has also raised concerns among investors leading to a sharp dip in the stock price of the company, which is currently trading below . 1,900 per share. The company has an order backlog of . 1,59,600 crore as on June 30, 2011 vis-à-vis its order book position of over . 1,64,000 a quarter ago. While even with the current backlog, the company is comfortably placed having revenue visibility for at least three years. Further slippages in the order inflows can significantly impact its performance in the near future.

On a positive note, however, the company's bottomline has grown by an impressive 22%, beating estimates by good margins. A significant rise in other income has boosted the PAT for the quarter.

At the same time, a negative growth in employee cost and controlled increase in raw material expenses have helped the company improve its operating margins by about 70 basis points for the quarter vis-àvis Q1 FY11.

However, growth in operating margins can be attributed to the company's industry segment as margins have declined in its power business during this period. A visible increase is on interest costs, which has more than doubled vis-à-vis Q1 FY'11. However, the amount is not material to substantially impact its profitability. Going forward, order inflows can continue to hurt for at least another quarter as rising interest costs are likely to impact the finalisation of the upcoming power projects.

The situation, however, may improve by Q3FY12, when some of the major orders, especially NTPC bulk tendering, are likely to be finalised and awarded.