In Q2FY2009, the net sales of Bharat Bijlee Ltd (BBL) grew by 11% to Rs150.9 crore, which is higher than our estimate.
The operating profit of the company declined by 18.2% year-on-year (y-o-y) to Rs21.3 crore, resulting in a 500-basis-point decline in its operating profit margin (OPM) to 4.1%.
The margin declined on account of a high staff cost and a lower absorption of the fixed costs due to lower sales volume.
The interest cost increased by 85% to Rs1 crore mainly on account of a higher cost of funds and an elongated working capital cycle. The depreciation charge rose by 48.8% to Rs1.3 crore.
Consequently, the net profit of the company declined by 23.7% to Rs12.5 crore, which is marginally higher than our estimate mainly due to the higher than expected revenues generated during the quarter.
The new capacity of 3,000MVA has been set on stream now. BBL’s total manufacturing capacity for transformers now stands at 11,000MVA. The new capacity of the company is likely to be its revenue driver in the future.
We have revised our earnings estimates for BBL mainly to account for the expectations of a lower than expected growth in its revenues and a decline in its OPM in the future.
We now expect the revenues to grow at a compounded annual growth rate (CAGR) of 12.1% over FY2008-10E. Subsequently, our FY2009 and FY2010 earnings per share (EPS) estimates now stand at Rs118.9 and Rs137 respectively.
We maintain our HOLD recommendation on the stock with a revised price target of Rs950, valuing the core business at Rs822 per share and the marketable investments at Rs128 per share.
At the current market price the stock is trading at a price-earnings ratio of 4.5x and an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 1.6x our FY2010 estimates.