BHEL sinks 13% as analysts bearish post Q4 nos; see risk to order inflow, revenue

The state-owned power equipment maker created provision of Rs 961 crore for staff cost in FY17 and its outstanding order book declined 5 percent at Rs 1.05 lakh crore at the end of financial year.

Here is why brokerage houses remain bearish on the stock:

Brokerage: BoAML | Rating: Underperform | Target: Rs 141

The brokerage observed that there was a 900 bps recovery in gross margins. It sees risks to order flow, margins, and receivable write-off remains. It said that the current market price already bakes in positives and expects recovery to be gradual while reiterating underperform rating on the stock.

Recovery of receivables, which remained flat YoY at Rs 31,500 crore, remains key for near-term stock/ financial performance, according to the research house.

It believes going forward, BHEL would be a key beneficiary of the USD 15 billion opportunity presented by implementation of pollution emission norms over the next 4-5 years.

Brokerage: Macquarie | Rating: Underperform | Target: Rs 108

The research firm said the nascent recovery has been nipped in the bud with revenues declining and outlook for order inflows remaining un-inspiring. With negligible topline growth and increasing staff costs, earnings would remain rangebound, it feels.

It observed that the outlook for the firm remains very bleak and sees struggle for topline growth existing in FY18/19.

On the order inflows, management indicated that pipeline for thermal orders is only around 4GW. It might get additional 2.7GW of L1 orders converted into final orders. This is well below management commentary about 10-12GW of annual opportunity in India, Macquarie said.

With a very weak outlook on new thermal projects, BHEL is not the stock to play India capex revival story, according to the brokerage house that maintained high conviction underperform on the stock.

It cut EPS by 6 percent and 44 percent for FY18 and FY19, respectively but raised price target to Rs 108 from Rs 98.

Brokerage: Jefferies | Rating: Underperform | Target: Rs 100

"The revenue miss and 31 percent YoY order flow decline has led to 3-7 percent reduction in FY18E-19 EPS," Jefferies said.

While retaining underperform rating on the stock, the brokerage said it believes that the risk to revenue visibility was rising due to 5 percent YoY order book decline and muted pipeline outlook.

Further it believes BHEL's business model remains flawed as overcapacity will mean sub-10 percent medium-term return on equity.

Brokerage: Goldman Sachs | Rating: Sell | Target: Rs 138

It observed that Q4 results were below expectations and pay hike offset savings on raw material costs.

Goldman reduced its FY18-19 EPS 6.6/7.7 percent as FY18/19 order visibility remains subdued and it thinks medium-term revenue could be affected. Pipeline visibility on future orders beyond the L1 remains a challenge, it feels.

It expects the quality of earnings to be poor with other income/other operating income continuing to be a significant contributor to PAT. Moreover, salary structure revisions would require a provision of Rs 287 crore on a quarterly basis until further clarity on the pay structure, it said.

The brokerage house dropped its 12-month target price to Rs 138 (from Rs 141). "BHEL trades at FY19E P/E of 20.6X against the India capital goods sector average of 26X and generates the lowest FY18 return on equity in coverage at 4.4 percent, which we expect will continue to drive underperformance," Goldman said.

Brokerage: Citi | Rating: Sell | Target: Rs 142

The key reasons for the miss in earnings are slower execution; higher than expected wage hike provisions; lower other income; and higher interest costs.

Citi has maintained sell rating given BHEL continues to face the classic problem of an incumbent market leader in an oversupplied industry.

At 11:24 hours IST, the stock price was quoting at Rs 138.25, down Rs 15.05, or 9.82 percent on the BSE.

Posted by Sunil Shankar Matkar