How you should play BHEL, Havells India post Q2 earnings

In an interview to CNBC-TV18, Misal Singh of Religare Capital Markets reviewed the second quarter financial performance of integrated power plant equipment manufacturer BHEL and electric engineering company Havells India.

Given the fairly low order inflows in the first half of the year, BHEL is likely to underperform. Its earnings may degrow in FY14-15, he cautioned. The broking firm has a sell recommendation on BHEL. Havells India also reported below expectation earnings in this quarter, but Singh expects the company to perform well in the second half of the year. "It is a good quality company. We see a 15 percent upside on Havells from these levels," he added. Below is an edited transcript of Misal Singh's interview on CNBC-TV18. Q: How disappointing were BHEL numbers? What is your rating on the BHEL counter now? A: We have a sell recommendation on the stock. The disappointment was primarily on order inflows. In the P&L, there was revenue growth which was slightly lower than expectations, but then quarterly numbers do not matter in this case. However, the order inflows for the first half have been fairly low. In the beginning of the year, we had an expectation of order inflows of about Rs 35,000-40,000 crore. The company may underperform on that, so, that was a big disappointment. This means in FY15 too, we fear de-growth in earnings. Q: With what kind of a price target would you maintain a sell? A: We have Rs 200 price target on a 10 times multiple for FY15 which is about Rs 20 of our estimate. So, we have Rs 200 price target for one year. Q: The other stock which reacted quite a bit to its numbers was Havells. What is your takeaway from Havells? A: They had a bad quarter, essentially because in Europe the revenues and the margins were lower than expectations. In India, in the cables business, because of the industrial slowdown the revenue growth was slightly lower than expectations. However, it is a good quality company. The RoCs are high for the Indian business. The European business is recovering. While numbers were below expectations the second half maybe better, hence we see a 15 percent upside on Havells from these levels. _PAGEBREAK_ Q: Have you done any major earnings downgrades after this quarter? A: No we have not. We are factoring in about 10 percent earnings growth for Havells for 2013, which is fairly modest given the kind of growth that they had in the domestic business already. So that is a fairly modest earnings growth. We have not touched our estimates. We have kept our target price at the same level as before the results. The stock did come off significantly. While the quarter was not great, the second half should be significantly better, because of which there is a 15 percent upside from these levels over the next six-12 months. Q: Crompton Greaves will report numbers later this week. What are your expectations from that company? A: We are expecting a PAT of about Rs 130 crore compared to roughly Rs 116 crore in the last quarter. In case of Crompton Greaves, it is a tough call on the quarter because we have seen what happened in the last five-six quarters. However, the earnings estimates as well as the valuations in case of Crompton Greaves have bottomed out. If one is looking at a long-term play, from a six-12 month play from hereon, one can see about 20-25 percent upside on Crompton Greaves. So, in terms of the quarter your guess would be as good as mine because of what happened in the last five quarters - it has been very unpredictable. But, if one looks at the full year numbers or next year numbers, the estimates have bottomed out. Hence there is a case for upside.