Hold BHEL; target of Rs 275: Emkay

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Hold BHEL; target of Rs 275: Emkay

Emkay Global Financial Services has recommended hold rating on BHEL with a target of Rs 275, in its January 27, 2012 research report.

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Emkay Global Financial Services has recommended hold rating on BHEL with a target of Rs 275, in its January 27, 2012 research report.

"BHEL witnessed reduction of orders worth Rs58.5 bn (1.5 GW) from its order backlog on account of (1) order cancellation in private sector and (2) change is scope of order - key highlight for the quarter (order details not given, not hazarding a guess). Further order inflows situation remained dismal as BHEL secured mere Rs24.7 bn orders in Q3FY12 and Rs133.6 bn in 9MFY12 (net of reductions). Consequently, BHEL's order backlog declined 9% qoq and 7% yoy to Rs1465 bn, first decline in last 27 quarters."

"Post dismal order inflows in 9MFY12 (Rs133 bn), it is an absolute certainty that BHEL will miss its FY12E order inflow target of Rs660 bn - given the high competitive intensity and low investment activity in power sector (BHEL refused to give any guidance in view of DRHP filed). Further, above reduction in order backlog has raised concerns on BHEL's revenue visibility and quality of order backlog for ensuing quarters - given presence of orders without regulatory clearances (land, environment or fuel). However, BHEL has indicated absence of any slow moving orders in its order backlog, which could be challenged in ensuing quarters. BHEL Q3FY12 performance met expectations - on the back of healthy revenue growth, high other income and lower tax incidence. Led by robust Rs1.6 trillion order backlog, revenue growth was healthy at 19% yoy to Rs107.4 bn - in line with estimates. Sharp fall in EBITDA margins down 360 bps yoy to 19.4% (Vs estimates of 20.3%) was due to 65% yoy jump in other expenses. Rise in other expenses was largely due to (1) increase in selling expenses (+121%) and transportation costs (+67%) and (2) higher provisioning (+47%). Consequently, EBITDA grew marginally to Rs20.8 bn - below estimates. However, net profit growth at 2% yoy to Rs14.3 bn was in line with estimates aided by high other income and lower tax incidence."

"With multi-fold challenges to the core business model and lack of triggers to earnings as well as rating, we maintain BHEL as top AVOID in the Emkay coverage universe. Also, we are more likely to witness 20% earnings decline in FY14E. Though, we believe that PER de-rating from 23X to 13X could be the floor, lack of earnings growth, lack of triggers and challenges to business model makes it unattractive. We maintain our negative bias with HOLD rating and revised target price of Rs 275 per share," says Emkay Global Financial Services research report.

Non-Institutions holding more than 90% in Indian cos

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To read the full report click on the attachment