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Feb 06, 2013, 02.43 PM IST | Source: Moneycontrol.com

Sell Bharat Heavy Electricals: Ventura Securities

Ventura Securities is bearish on Bharat Heavy Electricals (BHEL) and has recommended sell rating on the stock in its February 04, 2013 research report. According to the research firm, for FY13, the company expects order inflows of Rs 25,000-30,000 crore implying an order inflow of Rs 15,000 crore -20,000 crore in Feb- March.

Ventura Securities is bearish on Bharat Heavy Electricals (BHEL) and has recommended sell rating on the stock in its February 04, 2013 research report. According to the research firm, for FY13, the company expects order inflows of Rs 25,000-30,000 crore implying an order inflow of Rs 15,000 crore -20,000 crore in Feb- March.

"BHEL earnings missed the street expectation with revenues declining by 4.6% YoY mainly on account of delay in payments from clients. With dwindling industrial growth and no revival in growth in the capital goods sector, the scenario for power equipment manufacturers like BHEL remains bleak. Despite government’s focus in resolving power sector issues by way of financial restructuring of SEBs, fuel shortages in the sectors dampens any possibilities of revival of the investment cycle in the power business. The management stated that while there is some traction in ordering in the central and state utility side, private sector ordering has dried up. This is turn possesses threat to future order inflow. Company is focussed on cash collection and has stopped supplies to several customers thereby limiting working capital deterioration.

Currently BHEL trades at a PE multiple of 8.8x and 9.9x FY13E and FY14E consensus earnings, much below its historical bands. Factoring the above concerns and cheap valuations, we recommend the investors to SELL the stock. While the current prospective valuation do not ordain a SELL , however, we foresee significant downside risks to further earnings given the cumulative impact of private sector order inflow drying up, severe stress on margins for PSU business due to aggressive competitive pricing, working capital woes building in and poor visibility of investment cycle.

BHEL reported Q3FY13 revenue of Rs 10219.7 crore, declining by 4.4% yoy. Revenue from the Power segment declined by 4.6% yoy to Rs 8307.6 crore while the Industrial segment posted revenue for Rs 2236.5 crore, down by 5.5% yoy.

Blended EBITDA margin for the quarter stood at 16%, decline of 310 bps YoY mainly on account on increase in other operating expenses (+11.1% YoY basis). Management attributed to increase in operating expenses to inflationary pressure and normal provisions. Other income increase by 39% on YoY basis and 154.3% on QoQ basis mainly on account of exchange rate gain (Rs 179 crore). Interest expenses have increased by 250% yoy to Rs 50 crore. Although the number is miniscule as compared to PAT or Net Income, it indicates working capital pressures faced by the company. PAT declined by 17.5% on YoY basis to Rs 1181.9 crore. The net margins stood at 11.6%, down 180 bps YoY.

BHEL outstanding order backlog stood at Rs 1, 13,700 crore (down 22.4% yoy) , with orders inflow worth Rs 1980 crore during Q3FY13. Order inflow for 9M FY13 stood at 10,693 crore. In month of January, the company has received order worth ~ Rs 5,000 crore which includes NTPC’s Nabinagar plant Rs 2,880 crore and an electro-mechanical package for a hydro project in Bhutan (Rs 750 crore) and other smaller orders in the Industrial segment. The current order book (Q3FY13) represents 2.3x FY12 sales ensuring revenue visibility in the near term. The capacity utilisation stands at 70-80% for 9MFY13.

For FY13, the company expects order inflows of Rs 25,000-30,000 crore implying an order inflow of Rs 15,000 crore -20,000 crore in Feb- March. The company is L1 in Odisha Power Generation Company Limited order of 2*660MW. It was the lowest bidder in the Rajasthan order of Suratgarh and Chabbra and is L1 in these orders. LOI for Suratgarh and Chabbra is likely before March 2013.

There were a couple of private sector orders for which BHEL had stopped the work as the customers were not making payment. These include Indiabulls projects (Nashik Phase II) and Visa Power. Beside in case of Indiabulls Nashik Phase1 Unit 4-5 are progressing slowly. In order to focus on collection, the company has tied with bank financial institutions to get priority / direct payments.

Segment wise EBIT margins analysis indicate sharp margin contraction in the Industry segment. The EBIT margins from this segment reported a YoY decline of 1330bps to 18.3%. While in the Power segment, the margins contracted by 70 bps to 18.3%," says Ventura Securities research report.

Institutional holding more than 40% in Indian cos

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