Bharat Heavy Electricals Ltd’s (Bhel) results for the September quarter were slightly better than expectations. Revenue rose by 25.7% to 8,328 crore, and earnings before interest, tax, depreciation and amortization (Ebitda) grew by 32.5% to 1,632 crore. The Ebitda margin improved by around 100 basis points, which came as a positive surprise. One basis point is one-hundredth of a percentage point.

But note that margins would have been flat, but for a drop in net provisions made for contractual obligations, liquidity damage and doubtful debt. In last year’s September quarter, these provisions, accounted for in “other expenditure", amounted to 82.2 crore. In the last quarter, they fell to around 35 crore, according to a report by Alchemy Research. Net of provisions, the improvement in margins would be just 20 basis points and the increase in Ebitda would have more or less tracked the rise in sales.

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The company had increased capacity in the last fiscal, which has driven both revenue and its order execution rate. Gross revenue as a proportion of the quarter’s opening order book position rose to 5.9% in the September quarter, compared with 4.7% in the June quarter and 5.6% in the year-ago September quarter. Order inflows surged 83%, largely because of a low base. Bhel’s management told analysts on a conference call that it is maintaining its order inflow guidance of 60,000 crore, the same as the previous fiscal.

The company’s order book position has risen by 23% on a year-on-year (y-o-y) basis. Bhel’s book-to-bill ratio, which is the order book divided by trailing 12-month gross revenue, was steady at 4.17 times last quarter, compared with 4.21 times in the June quarter.

In sum, the results were healthy. The only trouble spot seems to be the rise of 300 basis points in raw material costs as a percentage of the firm’s value of production. This is after four consecutive quarters of a y-o-y decline in these costs. Considering that the comparable base will be relatively low for the next three quarters, raw material costs can be expected to rise similarly in the next few quarters.

According to Alchemy’s analysts, “With prospects of decline in the order inflow during FY11-13E, the company has entered a structurally slower phase of earnings growth. Bhel traded at an average one-year forward price-earnings of 20 times during FY04-09. We expect, going ahead, that Bhel should trade at 15% discount to its historical average price-earnings".

Bhel now trades at around 18.5 times estimated earnings for FY12, indicating a downside based on Alchemy’s prognosis. Of course, things could be different if order inflows turn out to be higher than expected.

Graphic by Paras Jain/Mint

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