Recommendation: Hold
CMP = Rs 2,080
Key points:
- Bharat Bijlee Ltd. (BBL) revenues grew at a CAGR of 36.7% and net profit increased at a CAGR of 45.8% over FY2006-08. The transformer division of the company has reported first full year of operations for its enhanced capacity of 8,000MVA. The company is further increasing its transformer capacity to 11,000MVA. The new capacity is expected to be operational by July-September 2008.
- The motor business' revenue grew by 24.5% in FY2007. The outlook for the current year also looks promising. However, the demand from certain sectors, particularly sugar and textile machineries, is slackening. During FY2008 the company obtained orders worth Rs 629 crore compared with Rs 579 crore in the previous year. In the first two months of FY2009, the company received orders worth Rs 97 crore (vs Rs 67 crore in the same period of FY2008), taking the total outstanding orders to Rs 362 crore.
- The management has indicated that the revenue growth may decline in Q1FY2009 mainly due to the disruption of production at the current plant on account of the ongoing work at the site to develop a new capacity. The new capacity is likely to be commissioned by August 2008. Consequently, the Q1FY2009 results would remain subdued and might decline in the top line and profits. The management seems confident of covering some lost sales in the subsequent quarters.
- The commissioning of the new capacity and the subsequent expansion in the capacity would remain the key to growth of BBL for the next couple of years. In our view, the near-term performance of the company would remain subdued which would be a drag on the stock.
- At the current market price the stock is trading at 8.7x its FY2009E earnings and enterprise value/earnings before interest, depreciation, tax and amortisation of 3.3x.
- I would recommend a HOLD call on BBL for next at least 6 months.
