September 11, 2008

Analysis : BEL annual results

Read my earlier analysis of BEL here

Results summary
The company had an average year in 2007-2008. The sales growth was around 7% and the profit growth was around the same. The net profit margin improved to around 20%. The company maintained the ROE numbers at the 25%+ levels and continues to be a zero debt- cash rich company
The open order book has now increased to 9586 Crs with around 3100 Crs executable in the current year. This provide visibility to around 80% of the annual revenue.
The business is skewed to the fourth quarter due to the projects nature of the business and hence the company accrues almost 60% of its profit in the last quarter.

The positives
The company maintained its ROE, margins and other key performance indicators such as order book, Fixed asset Turnover ratio, Raw material costs etc.

In addition the company is now spending almost 5.1% of revenue on R&D and plans to increase it to 8-9% of sales. This is a very positive development as R&D is crucial in this business . BEL is among the very few indian companies which spend on R&D and may have the highest spend in terms of sales. The company has been developing a lot of new products and now gets almost 83% of the turnover from indigenously developed products

The company has conservative accounting for foreign exchange (Company has no derivatives) and charges all changes to the Profit and loss statement.

Finally the company continues to be a debt free company with almost 2400 Crs in cash on the books. Net of cash, the ROE numbers of the company are fairly high, which reflects the strong competitive advantage of the company.

The negatives
The number that concerns for me is the high level of recievables. The recievables have shot up from around 1000 odd crores in 2005-06 to around 2080 Crs in 2007-08. As a result recievables have consumed almost 60% of the free cash for the last 2 years. This is very discomforting and will have to watched closely. The management has indicated that they are planning to bring it down, however I am still concerned about this number which is now a red flag.

The other concern is the very high skew for the fourth quarter. It is not very healthy to book so much business in a single quarter, especially the year end to make the numbers. Projects type business (for ex: blue star) have higher skews in Q4, however such skew results in poor recievables turns, bad debts and other issues (more on that later).

The valuation
The company now sells at around 6 times earnings (net of cash). So the market is clearly expecting the company to perform pretty badly. Now this is a company earning very high return on capital, growing in mid to low teens and in a business which is pretty immune to the economy (defence spending). In addition, though private companies are now being allowed in defence since 2001, BEL has been able to do well.
Other than the fact that the company is PSU, I cannot find a reason for almost a 50-60% drop in the stock price (other than that the market as a whole has declined).

Added note : I would not read too much into the Q1 results. As I said earlier in the post, if the company books too much revenue in Q4, the next years Q1 results get impacted.

I have loaded the a detailed analysis of the company in
google groups.

5 comments:

Anonymous said...

Thanks Rohit,
That is nice analysis of BEL though most of the stuff in the Excel was too heavy for me. I think i am being addicted to reading financial reports, calculations & valuations. I try to read each and every analysis you do, i have downloaded all the excel files from your group and go through them everyday, I read lots of ARs, and i am telling you that i am enjoying it. I know someday this will end up in building a nice & well balanced portfolio.

Thanks
Ani

Rohit Chauhan said...

Hi ani
welcome to my world :)
good to know a few people find it interesting and fun

regards
rohit

Anonymous said...

Hey Rohit
Due to heavy selling by Morgan stnly & other Investment bankers, Asian Electronics is trading at Rs.68

Net Profit Margin: Improving since couple of years.
RONW: 18% & above for last couple of yrs.
Debt/Equity: 0.46%
Current Ratio 5.84%
BV: 245

Can it be a Graham style stock which is butchered by bad news but numbers are very good.
Can you please comment on this stock?

thanks
Ani

PD said...

Hi Rohit,

Many thanks for the update on BEL.

While using the BEL valuation template (assuming this is the latest template) - I notice change in formula for Capex maint calculation. In earlier templates you have calculated Capex maint. as = FA x 8% + Increase in working capital.

Whereas in this template you have calculated Capex maint. as = TA x 5% / (sales/TA)
or
= 5% x TA x TA / Sales.

Can you let me know the reason behind this change?

Similarly, I notice Capex for "actual" as = Increase in FA + Increase in working capital.

However for projections you used
- "Increase in FA" as capex in "anal" tab.
- Increase in FA + Increase in working capital in “anal-pes” tab.

In past also for projections – some time you use “Increase in FA” alone as capex and some together with increase in working capital.

Appreciate your response on above.

Regards
Prashant Dubey

Rohit Chauhan said...

Hi prashant
i actually need to do some clean up on these worksheets.
the formulae i am using is as follows
maintenance capex = maintenance value for FA and maintenance value for Wcap

i use the past numbers as a guide and not for precisely determining the maintenance capex numbers

so 8%*FA works if the Sales turnover (Sales/FA) is around 1 and the company will grow by 6-7%. the reason for using the divisor is to adjust the maintenance capex by the sales multiplier ..so if Sales/FA is 2 ..then the approproaite value would be around 8*FA/2.

If i use FA then, i have add the impact of Wcap also. however i have taken a short cut of adding the FA change and Wcap change into TA and using that to arrive at rough maintenance capex numbers

I need to fix the capex numbers ..they should be difference of TA and not FA. the reason for not looking at that closely is because the final intrinsic value depends on the maintenance capex and hence the slopiness.

finally in some cases i have used only FA as i may not be expecting an increased expenditure in Wcap.

thanks for pointing out the inconsistencies and as i said ..need to clean up these spreadsheets