Hold BHEL; target of Rs 277: KRChoksey

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Hold BHEL; target of Rs 277: KRChoksey

KRChoksey has recommended hold rating on Bharat Heavy Electricals (BHEL) with a target of Rs 277, in its January 31, 2012 research report.

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KRChoksey has recommended hold rating on Bharat Heavy Electricals (BHEL) with a target of Rs 277, in its January 31, 2012 research report.

"BHEL registered strong net sales growth of 19.1% on a YoY basis as net sales increased to Rs 10,743.1cr, in line with our expectation. Operating profit margins declined to 19.4% as other expenditure as a % of sales increased by 340 bps. Consequently, net profits increased by 2.1% on a YoY basis to Rs. 1,432.6cr. Orders worth approximately Rs 5,847 cr were cancelled during the quarter. Order backlog at the end of the Q3FY12 stands at Rs 146,541cr, 3.1x TTM sales. For 9MFY12, order inflow remained muted at Rs 15,273 cr, while order inflows in power segment for the quarter were almost nil."

"Net sales increased by 19.1% YoY, led by order execution in power segment. Power segment increased to Rs. 8,711.5 cr and constituted 79% of sales. For 9M FY12, BHEL registered net sales growth of 17.8% largely in line with our sales growth estimates for FY12. For Q3FY12, BHEL registered of 19.4% as other expenditure increased by 65% to Rs. 1,311 cr. Increase in provisions and freight cost primarily contributed to higher other expenditure. Provision increased from Rs 169 cr in Q3FY11 to Rs 387 cr, while freight expense increased from Rs 210cr to Rs 351 cr. Freight cost increased on account of use of multi-axles trailers and multi-modal means of transport. Provsion for Liquidated damages and contractual obligations constituted major portion of provisions."

"Order backlog at the end of the Q3FY12 stands at Rs 146,541 cr vs Rs 161,000 cr in Q2FY12 as orders worth approximately Rs 5,847 cr were cancelled during the quarter. Cancelled order was from private player. BHEL commented the client wanted to shift from sub-critical to super-critical. However, current environment made financing unfeasible. For 9M FY12, BHEL registered order inflow worth Rs 15,273 cr. Power orders constituted Rs 9,465 cr, while industry related orders constituted Rs 6,393 cr. During Q3FY12, BHEL received LOI from Abhijeet Industries and ONGC for orders worth Rs 630 cr and Rs 774 cr respectively" BHEL has delivered the results in line with our estimates. Order inflows continues to disappoint as issues related to environmental clearance, coal linkages and litigations continues to plague investments in power sector. At CMP of Rs. 245 BHEL is trading at P/E of 9.4x its FY12 EPS and 8.8x its FY13E. Considering macro headwinds in power sector, we assign a multiple of 10x its FY13 earnings and recommend a HOLD on the stock with a price target of Rs 277," says KRChoksey research report.

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