The Hindu Business Line : Bharat Bijlee: Buy

BHARAT Bijlee's (Rs 795) efforts to reorganise its business portfolio, coupled with the growing demand for transformers as a result of power sector reforms, are likely to accelerate the company's earnings growth. Investors can consider buying the stock with a medium-term perspective. The stock trades at 17 times its expected FY-06 per share earnings and the price is at a discount to its competitor, Emco.

Revenues are likely to remain flat for FY-06 owing to the divestment of the elevator field operation segment. The current order backlog is likely to translate into earnings in FY-07 with an expected PEM of 12.

Bharat Bijlee is an electrical engineering company that makes a range of low-tension, standard and tailor-made motors and power and distribution transformers. The company's client list includes Jindal Steel, Thermax, Reliance Industries and a number of State electricity boards (SEBs). The company also exports to Egypt, Jordan, Sri Lanka, Bangladesh and Nepal.

Improved product mix and market share resulted in highest ever inflow of orders for the company in FY-05. The momentum of order inflow has increased this year, as a result of investment activities by Power Grid Corporation, Rural Electrification Corporation and SEBs.

This is reflected in Bharat Bijlee's comfortable order backlog of about Rs 190 crore. This is likely to translate into revenue within the next 12 months and adds visibility to earnings growth in FY-07.

Divestment electrifies margins

Bharat Bijlee has resolved the litigation over the sale of its Elevator Field Operation (EFO). After the divestment, the company's operating profit margins (OPM) improved by 200 basis points to 13 per cent for the quarter ended September 2005. Bharat Bijlee's OPM is on a par with peers and better than of companies such as Crompton Greaves. The divestment is also likely to increase the company's focus in the transformer division and capitalise on the current boom in the power equipment sector.

Bharat Bijlee has enjoyed a comfortable cash position despite operating in a working-capital-intensive industry with long cycles. The company has been able to fund its expansion plans with internal accruals and debt and plans to adopt the same strategy in future. This is likely to keep the equity intact and reduce the chances of dilution in earnings.

Motor products account for nearly 40 per cent of Bharat Bijlee's revenues. The current capital spending by various industries is likely to boost revenues from this segment.

The thrust on power transmission and distribution by Central and State authorities would act as demand drivers for Bharat Bijlee's transformers segment. Generation capacity of 1 MW warrants transformer capacity addition of about 7MVA. The Tenth Plan requires a capacity addition of 34,725 MW. The target for the Eleventh Plan has been increased by 80 per cent over the previous. This is likely to translate into huge business opportunities for large and small players, at various levels of transformer capacities. Hence, Bharat Bijlee is likely to get its share of the business for the equipment capacity at which it operates.

The National Power Grid Corporation has taken up the task of ramping up transmission facilities. SEBs have been upgrading their T&D infrastructure to reduce transmission losses. Bharat Bijlee already has committed customers such as the SEBs of Maharashtra and Karnataka.

Concerns

The hike in the prices of raw materials such as copper may affect margins. The company has a number of SEBs as its clients, whose financial health continues to be a cause for concern. However, financial assistance under the Accelerated Power Development and Restructuring Programme is likely to reduce the risk of non-payment. The boom in the power equipment segment may see new entrants in the sector and add pressure on margins.

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