BHEL's backlog of around Rs 1,10,000 crore with three year execution track record would give it a revenue line of somewhere around Rs 35,000-40,000 crore in the next few years. To that extent this revenue decline was anticipated. L&T is better off because other companies in the space have had 10-15 percent decline
Lokesh Garg of Kotak Institutional Equities says BHEL's poor Q1 numbers have not come as a surprise. He says BHEL's backlog of around Rs 1,10,000 crore with three year execution track record would give it revenue of around Rs 35,000-40,000 crore in the next few years.
"This revenue decline was anticipated, just that it has panned out this quarter and panned out strongly," he told CNBC-TV18.
The bad patch for BHEL may continue due to its weak order inflows trajectory, he added. He is looking at FY14 earnings of around Rs 15 on the stock. He advises investors to stay away from BHEL, atleast for now.
Below is the verbatim transcript of Lokesh Garg's interview on CNBC-TV18
Q: How disappointed or surprised were you with the numbers of Bharat Heavy Electricals (BHEL)?
A: To some extent numbers could have been anticipated. BHEL's backlog essentially of something like Rs 1,10,000 crore with three year execution track record would give it a revenue line of somewhere around Rs 35,000-40,000 crore in the next few years and to that extent this revenue decline was anticipated, just that it has panned out this quarter and panned out strongly, but it is not something which is completely a surprise to us.
Q: Do you believe that things will pick up in Q2 and Q3 or it looks like this is the track for the next couple of quarters at least?
A: Our outlook is that this bad patch may actually continue. This is essentially related more to order inflows trajectory. I think the order inflow trajectory continues to remain weak on all the issues that we know in the power sector and until and unless that presumes this performance on execution front also continues.
Q: How much have you brought down your FY14 earnings expectations by now after these numbers?
A: We are now looking at FY14 earnings of something like Rs 15 on the stock. The stock would have delivered something like Rs 28-29 at the peak, so there is a significant earnings correction that has panned out in the stock relative to revenues, relative to margins coming down as fixed costs do not get covered fully at lower revenue line levels.
In spite of whatever EPS or valuations one may look at one would want to wait out for order inflows recovery to start panning out at least a little bit before one starts to take a call on BHEL's stock.
Q: So even at Rs 130 you would not be recommending a buy to your clients?
A: Considering we are looking at this quarterly performance for the next couple of quarters or maybe almost year, year and half, we would not advise jumping into BHEL right away.
Q: Did you manage to take a look at the Punj Lloyd numbers since you track the sector where sales seemed to be stabilising, the run order over the last couple of quarters?
A: Yes, I have had a look. Punj Lloyd numbers essentially on operating level at least at revenue and EBITDA levels seem to be fine. Punj Lloyd has had very high working capital which is what puts us into a negative territory in terms of recommendation on the stock.
Q: What are you telling your clients about Larsen and Toubro (L&T)? Post those results the stock has had a very meaningful correction, in fact a derating. Do you see more price destruction?
A: I think what is happening to L&T is essentially symptomatic of the rest of the sector as well. If you look at Thermax results, Siemens results, Cummins India results everybody is having the same problem.
L&T is maybe better off because the other companies have had 10-15 percent decline, L&T still had a revenue growth of about 5 percent which is possibly also driven by the fact that L&T has managed the cycle better in terms that it has got business in areas which are less dependent on industrial and infrastructural capex, essentially real estate and now they have started to get meaningful business from Middle East as a geography as well.
So for L&T from a two year perspective we are at least advising clients to add the stock out here. We believe valuations are reasonable and to that extent giving credit for the company to have managed it well so far. However, this does not deny the fact that essentially L&T also operates in the same environment in which these other stocks are operating and to that extent, the stock could see near-term downside or negative surprise in operating performance in the next couple of quarters.
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