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Jul 22, 2013 03:20 PM IST | Source: CNBC-TV18

BHEL order book to improve, but not its stock: AnandRathi

Amol Rao of Anand Rathi Institutional Research told CNBC-TV18 that BHEL still stands a very good chance of wining a significant portion of available power projects. However, he expects BHEL stock to remain under pressure despite order wins.

Shares of Bharat Heavy Electricals have fallen nearly 13 percent in the last two trading session, wiping-off over Rs 6,000 crore from its market value, amid investor concerns over the sluggish pace of new orders.

Speaking to CNBC-TV18, Amol Rao analyst at Anand Rathi says the company currently is encountering headwinds on two accounts: 1) the interest rate gyrations occurring in the economy and 2) the fact that BHEL is always considered a proxy to national capex.

He believes that BHEL still stands a very good chance of wining a significant portion of available power projects. However, Rao expects BHEL stock to remain under pressure despite order wins.

Also read: See 20-30% downside in BHEL: Dipen Sheth

Below is the verbatim transcript of his interview to CNBC-TV18

Q: We hear about collapse of orders because the coal blocks that have been allotted to some of the Bharat heavy Electricals Limited’s (BHEL) potential clients are being pulled back and therefore potentially the order book will look bad. What have you picked up? What is this 12-15 percent fall in the stock telling you?

A: We believe that BHEL currently is encountering headwinds on two accounts. 1) The interest rate gyration that is occurring currently in the economy. 2) The fact that BHEL is always considered a national capex proxy. So, with problems being encountered on the coal block front, the company is suffering from an overhang or the fact that people feel that power capacity would not be added.

However, let me add that there are selective and let us say very well known facts that are in the public domain that there are power projects, large scale power projects in the central and state sector that are continuing irrespective of these problems. We believe that BHEL stands a very good chance of buying a significant portion of these orders. So, while some of the concern is well founded, quite a bit of it is unfounded too.

Q: What is your sense of the stock itself – at Rs 162 are you buying the stock or you would think that this course had to play so you could see more near-term falls?

A: The stock is suffering from an overhang and the perception is that the capex cycle in the country has come to a complete halt. While the perception is partly correct we do believe that BHEL will continue to suffer despite winning certain orders in the next couple of quarters. Yes, the stock would be under pressure in the near-term.

Q: What about the valuations of the stock, are they at a big discount to its intrinsic worth, trading at somewhere around 1.2 times FY14 price to book, how are you valuing this stock and purely on that parameter how do you approach it?

A: On a price to book basis, it is around 1.1-1.2 times. I believe that for a company the size of BHEL, this is extremely good but given the interest rate problems that we are encountering currently in the market, this would see some amount of de-rating in the near-term.

Fundamentally speaking the company is near its trough valuations, which coincides quite significantly with the last trough that it saw in 2001-2002. So yes, from a valuation perspective, this stock is trading near its historical lows. I believe that this looks very attractive from a valuation perspective purely. Even if you look at it from fundamental perspective, a company of 20,000 megawatts (MW) at its disposal would be in a significantly stronger position to deliver or secure orders in the foreseeable future in comparison to a lot of its competitors.

Q: You spoke about several factors like the capex cycle going for a toss and the freshly emerging interest rate issues – logically this should affect the entire space but we have not seen that kind of a decimation of Larsen and Turbo at all?

A: L&T is a company which has significantly diversified revenue streams and is not focused purely on the boiler, turbine generator (BTG) play for its revenues or for its cash flows. Whereas, BHEL could be perceived by that logic to be a single stream or a single product company. It relies completely on BTG or the industrial orders from the power segment to sustain its cash flows as well as its operations.

It would not be too fair to compare the two companies in terms of pure operations.


Q: You have a target price of Rs 228 on BHEL if I am not wrong that is a huge upside to where the stock is currently at. What are you really basing this recovery or would you scale your target price anytime soon?

A: The target price that I have mentioned in my report is based purely on the fundamental analysis of the company past and expected future performance.

As far as orders are concerned, we believe that the company has already secured 1300 megawatts. We should be able to get another 6000-7000 megawatts comfortably in the coming year. These are all central and state backed projects. There is very little risk of a project getting cancelled. These are projects which have coal allocations where the environment clearances are well in order and financial closure has also has happened. It is only a matter of the project being awarded or project being declared as warrant to BHEL.

As far the target price is concerned, given the rock bottom valuations and let us says that the fairly robust delivery mechanism that the company has observed over the last couple of years despite all the problems in the economy and all the problems that the clients are oppose for it. It is very fair to assume that the company should be valued close to its trough valuations and it should be given a fair value on its asset base.

Q: Can you just tell us those numbers? What are its current valuations and what would be the valuations on assets?

A: If I remember correctly, in 2001-2002 the company traded close to its book value which is around 1 to 1.19 and the company is currently trading at around 1.2 times. It is close to its low valuations.

On revenue basis we think that the company should be able to easily garner around Rs 44,000-45,000 crore this year and deliver earnings per share (EPS) around Ts 22. It is trading at almost 8 times this year earnings, which is also very close to 7 times that it was trading at 2001-2002. However, interestingly in 2001-2002 NTPC was probably 90 percent of BHEL’s order book and order execution. Today it is around 60-65 percent. Things have changed pretty significantly.

Q: What is your expectation from Larsen and turbo today?

A: We are expecting somewhere in the range of Rs 14000 crore of top-line and around Rs 1200 crore of EBITDA. However, it would be very interesting to see what the company has to report in terms of orders because they will be winning huge amount of orders in the past couple of months.

Going forward we believe that the company should be able to maintain traction. It would be very crucial to hear what the company has to say on the domestic front because internationally the company is bagging orders in sub 200 million space. The order book would keep getting replenished. It is important to see how much of it comes from India and how much of it comes from outside.

Q: What would be a good number?

A: For orders, anywhere in the range of Rs 17,000 to 20,000 crore. This quarter should be very robust number to go by.

Q: If the company disappoints on margins and still reports healthy orders then how do you think the stock will move?

A: The fact that the margins are going to be slightly lower is very well known in the market because times are tough. All companies are grabbling for orders so, it would come as a no surprise if L&T experience marginal contraction. If it guided towards further margin contraction that is already build into most analyst numbers.

What would be important to see is that whether the order momentum is maintained despite the drop in margins.

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