During Q3FY2009 the total operating income of Bharat Bijlee Ltd (BBL) grew by 25.5% year on year (y-o-y) to Rs140.4 crore.
The operating profit margin (OPM) contracted by 90 basis points to 17.5% on the back of high raw material cost, which as a percentage of the sales increased by 107 basis points. Consequently, the net profit of the company increased by 8.1% to Rs13.3 crore during the quarter.
BBL has brought on-stream an additional capacity of 3,000MVA during the quarter, which was expected to drive the volume growth in FY2009. With the delay in the operation of new capacity the sales in M9FY2009 remained muted (+9% y-o-y).
For transformers, while BBL’s new capacity is now stabilizing, the macro situation in the transformer industry has turned challenging due to two major reasons.
First, while orders from private sector have already slowed down, we expect orders from state electricity boards to dry out during H1FY2010 due to elections. Second, with intensifying competition we expect pricing would be a pressure point and would hamper the profitability of the companies operating in the space.
For motors, the demand is primarily driven on the back of capital expenditure (capex) by the private sector. With pruning of capex by private companies, we expect the demand off-take for motors to be sedate.
Building in a slower volume growth and a lower realization we expect BBL’s revenues to grow at a compounded annualized growth rate of 6.9% over FY2008-10E. We have revised our earnings estimate downwards for FY2009 and FY2010 by 3.6% and 16.3% respectively.
Outlook and valuation
Given the bleak business outlook and the challenges the business could face in the near future, we recommend investors to book profit in the stock. The stock has yielded 127.5% return since our recommendation.
At the current market price the stock is trading at 3.8x FY2010E earnings per share (EPS). In the earlier down turn the stock has traded at a one-year forward multiple of 1.2x.
While at the current price the stock provides a dividend yield of 6.9% with lower profit, the company may cut the dividend paid to the shareholders.