Bharat Bijlee performed well for 1995-96 in its 50th year of existence. For 1995-96, its net sales at Rs 155.68 crore was 39.94 per cent higher over the previous year, while net profit at Rs 10.28 crore was almost three times higher than the previous year's figure of Rs 3.60 crore. This net profit was after Rs 9 crore provision for tax as against Rs 3.1 crore provision in the previous year. Bharat Bijlee declared a bonus in the ratio of 1:1.

A look at the company's past 10-year performance reveals that Bharat Bijlee's performance is highly cyclical and the profitability peaks once in four years before going down. Going by the first-half results of 1996-97, it appears that Bharat Bijlee's profitability is once again under pressure.

Bharat Bijlee is a major player in transformer and electrical motors with both these businesses together contributing 74 per cent of the 1995-96 turnover. Work and construction contracts (largely related to electrical installations) accounted for about 18 per cent of Bharat Bijlee's turnover.

The company also makes lifts for which it has a tie-up with Schindler group of Germany. The technical tie-up with Schindler ended this year and there have been reports that suggest a possibility of Schindler divesting its 10.8 per cent stake in Bharat Bijlee and setting up its own manufacturing facility.

In its main business - transformers, the company operates in the higher end of the market where there are few players like Crompton Greaves and BHEL.

Bharat Bijlee's improved profitability in the past two years (1994-95 and 1995-96) can be attributed to shift in customer profile - from state electricity boards to corporates like Reliance, Gujarat Ambuja, etc. The good industrial growth during that two years ensured not only volume growth but also improvement in operating profit margins to 13.54 per cent in 1995-96 from 8.3 per cent in 1994-95.

The other reason for good performance by the company in the past two years could be due to cordial employee relations during the past two years. The company has a track record of frequent industrial unrest. However, the competitive scenario in transformers is fast changing with players like Industrial Meters and Emco Transformers gradually shifting from low rating transformers to high rating transformers. Also, the impact of a slowdown in industrial growth is visible in the first-half of 1996-97. Thus sales have only marginally increased to Rs 70.50 crore in first-half 1996-97 from Rs 69.82 crore in first-half of 1995-96. The increase in costs resulted in operating margins sharply dropping from 13.38 per cent to 9.28 per cent.

The increased working capital requirements have resulted in interest as a percentage of sales going up to 3.52 per cent from 2.35 per cent during this period. The increase in other income from Rs 0.59 crore to Rs 1.29 crore and reduction in provision for taxation enabled the company to report a net profit at Rs 2.69 crore, which is a steep decline from Rs 4.23 crore in the previous half.

The key issue is - will Bharat Bijlee create a niche for itself in more value-added products, given the increasing threat from smaller players in the transformer business ? The diversification into lifts - although intended for this purpose - has not made much difference to the company so far. There is still adequate scope for the company to leverage on its 50-year-old brand identity and comfortable debt to equity ratio ( 0.89 : 1 as 31st March 1996) to chalk out its growth in new, but related businesses.

Currently, the scrip trades at Rs 900 (face value of Rs 100) and discounts the first-half 1996-97 EPS of Rs 95.22 by 9.45 times. Not much scope exits for appreciation at this level.

Kensource

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.