Bharat Heavy Electricals (Bhel) has announced its flash provisional results for FY2009. The company posted strong topline growth of 28.5% y-o-y to Rs27,505 crore (Rs21,401 crore) for FY2009, which was in line with our expectations.
The company witnessed strong execution during 4QFY2009, with gross sales growing 32.5% y-o-y to Rs10,550 crore (Rs7,960 crore).
On the operating front, the company’s performance was hit hard by the wage provisioning cost for the Sixth Pay Commission and Gratuity payments.
Pertinently, the company has been providing for employee costs since the past several quarters to account for the wage revision as per the Sixth Pay Commission guidelines.
The company had estimated total provisioning of Rs1,313 crore for the wage revision for FY2009. Since it had already provided Rs839 crore in the first three quarters of FY2009, the balance Rs474 crore was to be provided in 4QFY2009.
However, with Gratuity provisioning increasing to over Rs600 crore, Bhel finally ended up providing Rs1,728 crore for Employee costs for the full year.
Nevertheless, with the provisioning coming to end in FY2009, the company could see positive impact on its Margins FY2010 onwards.
With Bhel’s order book swelling to historic highs, we believe going ahead order execution would emerge as a key challenge area for the company.
Though the company has managed the execution reasonably well in FY2009, nonetheless several projects involving Bhel are already running behind schedule.
In addition, the company also faces a diverse set of challenges emanating both from the weak economic environment and increasing competition in the sector, which could limit further upside in the stock.
In wake of the new MoU signed and inputs gathered during the recent concall, we are marginally pruning our EPS estimates for FY2010E by 5.6% to Rs81.4.
At Rs1,532, the stock is quoting at a P/E of 18.8x FY2010E EPS and EV/ EBITDA of 11.5x FY2010E EBITDA, which we believe is expensive.
We assign a Target PE multiple of 16x FY2010E EPS for the company arriving at a Target Price of Rs1,303. Given the overall concerns and expensive valuations, we downgrade our rating from Neutral to REDUCE on the stock.