State-run capital goods giant Bharat Heavy Electricals Ltd (Bhel) pleasantly surprised markets with a strong December quarter performance. Reported net revenue and net profit were higher by about 25% and 31%, respectively, from a year earlier. Shares of the firm gained almost 3% post-results to Rs 2,272 apiece, after posting negative returns for one year.
Also See Margin Concerns (PDF)
It was the surprise on profit margins that broke the stock price inertia—operating profit margin (OPM) grew by 140 basis points year-on-year (y-o-y) and 380 basis points quarter-on-quarter (q-o-q). According to the company’s management, cost-control measures shored up profitability. Raw material costs as a percentage of sales at 55.4% dipped 120 basis points y-o-y and about 500 basis points q-o-q during the quarter.
But some gains accrued as Bhel aligned the mismatch in accounting practices for booking revenue and costs. This resulted in a one-time gain in revenue and profit after tax, of Rs 440 crore and Rs 60 crore, respectively.
However, sluggish order inflows have played spoilsport. Bhel has seen an 18% y-o-y decline in order inflows to Rs 12,600 crore during the quarter. But it is confident of achieving the guided Rs 60,000 crore for fiscal 2011 and holds a backlog of an unparalleled Rs 1.55 trillion.
Why then have the firm’s shares been languishing? There is scepticism on Bhel’s ability to maintain margins, given that 50% of its orders in the power segment do not have a cost-escalation protection. Also, the firm is reportedly faced with challenges on the vendor-supplier front. Further, during the quarter, the industry division, which accounts for about 23% of total revenue, registered a 130 basis points y-o-y dip in profit margin to 21%. There is heightened competition expected in the super-critical power equipment business, where most future orders are expected.
For now, Bhel’s shares are pricing in estimated fiscal 2012 earnings. However, its ability to sustain margins amid rising competition along with the expected bulk orders coming in the near term could make this elephant dance on the bourse.
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