Power sector not out of woods, but BHEL good bet: Edelweiss

Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets BHEL BSE | NSE 24/05/12 Are Mutual Funds betting on BHEL?

Despite concerns of margin pressure and cancellation of orders, Nischal Maheshwari of Edelweiss tells CNBC-TV18 that BHEL is a good bet at current valuations. "Around these levels, I would look at accumulating BHEL because it's now available around 9-10 times" he said.

However, he says that problems will continue to plague the company because the power sector is by no means out of the woods yet. "Even if the economy turns around, it's going to be at least couple of quarters before this sector is going to start seeing better days ahead," he said.

Other sectors Maheshwari bets on are FMCG and private sector banks. "Some of the smaller banks like IndusInd , Yes Bank and Federal Bank came out with pretty good numbers and not much asset quality problems, so these are some of the stocks to look at," he advised.

Below is an edited transcript of his interview with Sonia Shenoy and Latha Venkatesh. Also watch the accompanying video.

Q: What are you thoughts on what has come out for BHEL and for the capital goods sector as a whole?

A: I think one thing is quite clear that we are still not out of the woods as far as power is concerned and that is what is showing up in the order book. Cancellation of orders, orders not being there and margins are under pressure, so I think there is a whole lot of problem basically as far as power is concerned. The second thing which is coming is basically is if you look at another problem in BHEL is increase in its working capital and since there is no fresh orders coming in, its cash on the books has gone down from around Rs 10,000 crore to Rs 5,000 crore in the last two quarters. Both of these factors are telling you that there is no fresh capex which is happening on the ground as far as power is concerned, so that's a major issue as far as power is concerned.

But if you look at the whole capital goods sector, I think the common problem remains to be pressure on margins, working capital cycle going up and order books still under pressure. So if the economy turns around also, it's going to be at least couple of quarters before this sector is going to start seeing better days ahead.

Q: Within the capital goods space, is it an avoid on all or is it that you will still perhaps want to migrate to L&T instead of BHEL?

A: First on margins, I think margins on the BTG sector which BHEL is in basically is a structural problem out there. If you look at it for the last 1-1.5 years we have been expecting margins to be coming off in the sector because of the competition which has come up. So if you look at boiler turbine, there are now more than four players in that sector so margins were definitely coming under pressure.

In the 12th plan, you were not expecting the same kind of setting up of the power plant basically and that's why the order book was not strong. So visibility on the order book itself is going to be under pressure and that's why the margin pressure was supposed to be there. So structurally the margin pressure on BHEL continues so there is still some more way to go after what they have reported last quarter.

Having said that, around these levels I would start looking at accumulating BHEL because it's now available around 9-10 times. Structurally though there is pressure on that stock but on fundamental side if you look at it, it still remains to be the premier organisation possibly there are expectations that the government is going to come with a dumping duty against the Chinese goods and since now renminbi has been appreciating and rupee had depreciated it creates a lot of favourable position for BHEL. So that way valuation is the attractive part of BHEL but pressures on margins and everything else will continue.

Q: What did you make of what came out and with respect to specific stocks where is the conviction the highest to still accumulate at these levels after you saw the earnings?

A: The earnings have been better than what market was expecting. This was an extremely gloomy quarter when we started at the beginning of the quarter and the outlook what people have been projecting. Almost 50% of the results are out, top line has still been very interesting, 20-23% plus so that's the top line. Obviously margins are under pressure. So margin growth has only been around 6.5%, expectation in the market was around 3.5% growth only. The top line growth has been around 23%. So that way margin has been better then what market has been expecting.

Now where you see comfort still coming back I think consumers are still being pretty good. If you look at the results of whether Colgate has come out or expectations of HUL result I think consumers still continue to do well. There has been no led down as far as top line growth or margins are concerned. The private sector banks have surprised everybody. There were a lot of question marks as far as asset quality is concerned on the private sector bank. I think that's where some amount of comfort has come back of people investing into that. So these two sectors have been looking okay.

Q: Your previews had pointed to a tepid 3.3% growth in profits for the Sensex companies and 2.1% for the coverage universe. How is the actual performance compared to your expectations?

A: Its 6.5% growth as far as the bottom line is concerned. So better than our expectation till now.

Q: So you would expect that there won't be so many downgrades because that preview note had also said that you were expecting a 3% earnings EPS estimate cut for FY13 post the numbers. What do you expect now? Do you think we are not going to get any downgrades?

A: I still believe that the FY13 number may still be under pressure but FY12 number will get upgraded is what I see now.

Q: Any specific stocks that impressed you?

A: Some of the smaller banks Indus Ind, Yes Bank, Federal Bank, some of these stocks has come out with pretty good numbers, not much asset quality problems. These are some of the stocks to look at.