Religare Cap says BHEL not a buy despite correction

Suhas Harinarayanan at Religare Capital Markets does not see any positive fundamental triggers for the state-run Bharat Heavy Electricals Ltd (BHEL) in the near-term.

The capital goods major is facing stiff competition from Chinese players, especially with many power project developers placing orders with companies from China. The government on Tuesday said that BHEL fears losses due to availability of cheaper funds to the Chinese companies supplying equipment for power projects in India.

According to Harinarayanan, the reported order inflow in FY12 was disappointing. He says over capacity situation is likely to hamper BHEL’s order inflow going forward. 

BHEL reported a modest growth of 2.14% in net profit at Rs 1,433 crore in the third quarter of FY12. Total income of the company increased 19% to Rs 10,743 crore in the same period. 

Harinarayanan forecasts a decline in BHEL earnings in FY14. "We are not advising a buy on the company despite its recent price correction," he told CNBC-TV18.

At 10:31 hrs, shares of BHEL were trading marginally up at Rs 208.95. The stock is down over 11% in the last one-month.

Below is an edited transcript of Harinarayanan's interview on CNBC-TV18. Also watch the attached videos.

Q: BHEL is languishing at Rs 200-210. Do you see value in the stock here?

A: The last fair value that we had published was about Rs 225 per share. But that obviously assumed slightly more generous order inflows in FY12 compared to what they have ended up reporting.

Clearly, there is no reason to be in the stock even at current levels that is the view we would take. If the market moves up, there might be some trade on the stock. The stock is probably trading 8-10 PE on FY14-13, but clearly, there is no fundamental reason to be on the stock.

Q: Are you in the camp, which believes, that in next couple of years BHEL might be in a 'no growth' situation at all for earnings?

A: We are actually forecasting a decline in earnings. It is not no-growth. I think no growth is probably a few other stocks but BHEL is clearly likely to show decline in earnings in FY14. We have from Rs 26, which is what they report on their provisional numbers in FY12, the EPS could fall maybe to Rs 20-22 in FY14.

Q: What is the problem? Is it that they have grown the order book by meager amount in 2012 or is it execution issues, which is making you bearish about the next couple of years?

A: On an all India basis, we are probably looking at best for 75,000 MW being added in the 12th five year plan. As we understand, even for the 13th five year plan does not exceed that number any significantly. That is over a five year period means on annual basis you are looking at 15-20 gigawatt maximum capacity being added.

Compared to that the installed capacity for manufacturing for these power plants is about 32-35 gigawatt. So there is serious over capacity situation.
 
On one had, you have the actual number of power sector orders declining or clearly showing no growth. On the other hand, there is very serious competition in the generation segment. So you will obviously continue to see decline in orders generally for BHEL. Other participants might increase market share but for BHEL there is going to be serious loss of market share.

In terms of margins, it should ideally fall because you are starting from a certain revenue base this year and over the next two-three years the revenue base should fall. So, all that upgrading leverage which helped margins over the last five-six years that should come off in the next two-three years.

You have a case of declining orders, declining revenues, declining margins and declining EPS for the stock.