surpassing the MOU targets. Commentary on the two margin
levers—decline in raw-material prices and employee costs—was also
bullish. However, the company's guidance of 25-30% profit growth in
FY10 was lower than that implied by commentary on revenues and
margins.
BHEL could surpass management's guidance on profit growth if the
company is able to contain costs. In our view, it is still too early
to assume that costs pertaining to wage revisions are over, as final
negotiations are pending.
Increased provisions for liquidated damages and erections costs could
also constrain margin expansion.
FY10 revenue growth guidance ahead of MOU targets
: Management guided for 20-25% YoY revenue growth for FY10 as it
expects to better the MOU target of Rs320bn (16.3% YoY growth) under
'Excellent' rating. In our view, management commentary factors in
boost in net revenues due to reduction in excise duty. Our net revenue
growth estimate of 21.4% is in
line with management commentary.
Management sees no need for further wage provisions:
Provisions for wage revision during FY09 stood at Rs17.3bn. The actual
provision was higher than the earlier guided Rs13.13bn, because of
additional provisions of Rs6.6bn for gratuity (maximum gratuity
payable per employee has increased from Rs0.35m to Rs1m).
The numbers shared by the management imply that provisions for wage
hikes were lower by Rs2.45bn than the earlier estimated provisions of
Rs13.1bn. The management has projected FY10 salary costs at Rs45bn
against Rs41.9bn incurred in FY09. Our salary cost estimate of
Rs47.3bn builds a buffer for a need for further provisioning during
final negotiations.
Order inflow momentum to sustain:
The company expects the order inflow momentum to sustain and has
guided for order inflows of Rs500bn against order intake of Rs597bn
during FY09. Though this implies a YoY decline in order inflows, order
coverage ratio at end-FY10 would still be strong at above 4x,
providing revenue visibility beyond FY12.
According to the company, introduction of 270MW and 600MW sets has
helped bridge gaps in the subcritical segment and improved the
company's competitive position vis-à-vis Chinese players.
Cash balances have increased:
Cash balance as at end-FY09 has increased to Rs100bn from Rs83.9bn as
at end-FY08, as working capital cycle has not elongated. Inventory and
debtor days have remained steady. Buoyant order inflows have also
helped cash balances through customer advances. In our view, cash
balances have also been helped by dues to employees.
The provisions made for salary revisions are yet to result in cash outflows.
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