Experts mixed on BHEL earnings; price target at Rs 180

Sanjeev Zarbade of Kotak Securities considers, in an interview to CNBC-TV18, BHEL's earnings to be below par and highlights the increase in intake of orders and industry scenario as crucial factors for the PSU.

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Meanwhile, Rabindranath Nayak of SBICAPS Securities foresees an improvement in the execution of projects and brings into focus the pick-up in industrial investment that will smoothen the PSU's turnover. Nayak sets the target price for the stock at Rs 18 with a 'hold' recommendation. Below is the edited transcript of the analyses on CNBC-TV18 Q: How would you react to Bharat Heavy Electricals Ltd’s (BHEL) announcement of earnings which revealed net sales at Rs 50,015 crore, profit-after-tax (PAT) down by about 8 percent and orders worth Rs 31,528 crore? Zarbade: The earnings are below expectations. We expected some kind of a negative surprise because in the previous quarter also the company had faced problems in execution and to that extent, there was definitely a bias on the downside. Q: Doesn't the profit of Rs 6,500 crore as against a polled estimate of Rs 5,970 crore, come as a surprise? Zarbade: What is crucial for the company is not the profit, but the order intake and the industry scenario. Q: The stock is up 3 percent. What is your initial reaction to the earnings? Nayak: The earnings are very good. An order inflow of Rs 31,000 crore is significantly positive.
The net profit of Rs 6,500 crore was in line with expectation and is very positive from the profitable margin point of view. Q: Do you foresee problems in the execution of projects or are the overall earnings satisfactory? Nayak: I am happy with the overall earnings. We have begun to witness a pick-up in execution of projects across the public sector, particularly at the National Thermal Power Corporation (NTPC). And with expectation of CERC orders being positive for Adani Power and Tata Power, there will definitely be some improvement in execution of projects at BHEL. Q: Deterioration of working capital due to receipt of fewer orders was a big worry for BHEL. With the inflow of orders picking up, do you think the trend of deterioration of working capital has reversed at least at the margin-level? Nayak: To some extent, the trend will witness a reverse but in FY12 the deterioration in working capital was significant particularly due to the increase in receivables. Though there has been some improvement in the order inflow this year, it is not significant. But we foresee improvement some sort of smoothening-out of the turnover which will reduce pressure from the receivables.
But definitely, with the kind of order inflows, there will be some orders at good advances from the customers and to that extent it will improve the working capital going ahead in FY14-FY15. Q: Is the stock's rise just a minor uptick considering the continued long-term downcycle in power equipment or are you looking at a rerating? Nayak: The power equipment sector is in a state of oversupply. There is little to worry from Chinese competition as projection execution starts to smoothen out across the country. Industrial investment has started to pick up and this will bode well for BHEL’s turnover. Q: What is your target price on the stock? Does BHEL still face the risk of a further collapse in earnings? Nayak: We have factored in a collapse in earnings and contraction in margins. Margins will continue to contract over the next 4-5 years by at least 300 basis points (bps) especially in the EBITDA. Currently our target price is around Rs 180 with a 'hold' recommendation.