Tarang Bhanushali, analyst, IIFL believes the valuations of Bharat Heavy Electricals (BHEL) are way ahead of its fundamentals and it is not a good time to buy the stock. The stock is currently trading around Rs 250-270 per share.
The state-run power equipment maker disappointed street again on Thursday with the third quarter net profit falling 69.4 percent year-on-year to Rs 212.6 crore, dented by lower revenue and operating income. Earnings declined for the 9th consecutive quarter on yearly basis.
Speaking to CNBC-TV18, Bhanushali said margin pressure for BHEL is likely to ease from FY16 onwards but downgraded the company’s earnings estimates for FY15. He sets the target price of Rs 235 for the stock.
A couple of other brokerage firms like JP Morgan, Credit Suisse and Bank of America are also negative on BHEL and have reduced target price of the stock substantially.Below is verbatim transcript of the interview: Q: Can you tell us if you have changed your assessment of BHEL, have you downgraded your earnings estimates on the stock?
A: No, we have not downgraded it post the results, we have downgraded for FY15 but for FY16 and FY17 we have largely maintained our estimates. We believe that orders would be received in FY16 which were expected to come in this quarter largely because of the coal auction process, which would be held in February and March.
Orders have been pushed from FY15 to FY16 and this is where most of the orders would be seen for the company. On the earnings front, we believe that margin pressure would ease out to some extent in FY16 and FY17 largely from the orders received from the pubic sector undertakings (PSUs) and the fresh orders expected from Telangana.
Q: Do you believe things won’t get bleaker for BHEL?
A: I believe that the margins we have seen over the last two-three quarters would be the bottom for the company in the near-term once we see execution getting faster over the next few quarters largely as coal allocation would be completed and there would be many players which would be quite keen to start the building process.
We would see some execution build up but again we believe that on the valuation front, we are not comfortable, it is running quite ahead of its fundamentals and so we won’t be advising our clients to buy at current levels.
Q: What is your target price?
A: We have a target price of Rs 235 on the stock.
Q: What is the key problem for BHEL? Is it just lack of orders or is it execution delays as well as the working cycle problems? Even if orders pick up as you expect in FY16, will things improve for BHEL or will the execution issues derail the story?
A: I believe execution would remain slower to some extent in the next six-nine months or may be it would pick up in H2 of FY16 largely as the orders from Telangana are expected to be executed in a shorter period compared to other players.
Also, we might see more players coming back to the market once the coal auction is done and there is more clarity on availability of coal in the domestic region. So we expect that the execution would be faster in H2 and again FY17 is where we expect some more revenue coming in for the company.
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