Hold BHEL; target of Rs 243: Sushil Finance

Sushil Finance has recommended hold rating on Bharat Heavy Electricals (BHEL) with a target of Rs 243, in its June 28, 2012 research report.

“BHEL posted Consolidated Revenues of Rs. 475,990 mn (including other operating income), registering a growth of 13.7% YoY. Despite 380 bps increase in RM cost, its EBITDA increased by 15.7% YoY to Rs. 91,951 mn and EBITDA margins improved 30 bps to 19.3%. The margin improvement was mainly due to containing the manpower cost at lower level and ~9% drop in other expenses. Its interest cost reduced by 5.9% YoY to Rs. 531 mn, while the depreciation increased by 47% YoY to Rs. 8,032 mn. Its PBT (including other income) increased by 14.4 YoY to Rs. 103,672 mn and its APAT stood at Rs. 70,873 mn, registering a growth of 17.2% YoY.”

“BHEL’s order book as on March’12 stands at Rs. 1,364.8 bn (down 18% YoY) on back of sharp 63% fall in order intake at Rs. 221 bn. During FY12, it secured orders worth Rs. 139.4 bn in its Power Sector segment & Rs 87.8 bn orders in its industry sector segment. However, its share of power orders at 2.8 GW still remained over 70% of total 4 GW announced during FY12. The decline in order inflows was mainly on account of slowdown witnessed in Power sector as developers are facing several challenges, which are affecting & delaying their investment decisions. The issues like coal & gas allocation, land acquisition, environmental clearances, project financing and poor financial health of SEBs severely affected decisions on many projects announced a year ago but could not be finalized. However, BHEL expects ordering environment to improve in FY13 due to Government’s steps towards (a) faster clearing of stuck projects amid pending clearance, (b) trying to assure reasonable fuel supply, (c) restructuring of SEB debts and (d) increasing power tariffs to put the sector on track. BHEL has set an optimistic target of equipment orders worth 14-15 GW out of expected Industry target of 24-25 GW in current financial year, which includes about 6 GW orders deferred from FY12. As result of spillover effect of FY12 coupled with fresh industrial and export orders, we expect BHEL should win atleast 8- 10GW. We will be keenly tracking this space as henceforth, after observing sharp de-rating, stock price should mirror FY13 ordering environment.”

“BHEL has underperformed the market and the stock is down ~45% in last 1 year. The primary reasons for underperformance are disappointed order inflows, suppressed operational cash flow on sharp increase in working capital (~Rs.81bn) during FY12 and subdued business outlook. However, we believe the current price seems to have already discounted the most of the negatives and there is not much downside left in the stock under the light of (a) growing Govt. efforts (b) 26% fall in INR vs USD in last 1 year, and (c) easing interest rate scenario. The management is targeting over Rs. 500 bn of turnover in FY13 and expected to improve its cash flow going forward as its debtors/inventory level has picked out and should not deteriorate further. BHEL has also been able to manage its cost effectively and contained the staff & other cost at lower level, which has partially mitigated the impact high RM cost and low margin orders to its overall margins. In view of its current order book which provides Revenue growth visibility of more than two years and with expected order inflows in FY13, we expect no major deterioration in its earnings in FY13; however stock Re-rating is possible only on reversal of ordering environment. Also, FY14E Revenues & earnings growth will largely depend upon its order inflows in ensuing period.”

“Though BHEL delivered decent numbers during FY12, its order inflows remained disappointed as it won power orders for 2.8 GW projects vs. 15 GW in FY11 due to lack of order finalization. Going forward, the order inflows will largely depend on Government’s steps on fuel linkage issue and finalization of decisions on imposing import duty on power equipment to provide level playing field to domestic players against Chinese & Korean Players. As per MoU signed by BHEL with ministry of Heavy industries, it targets Rs. 500 bn turnover for FY13, which we believe is achievable given its current order backlog. We expect BHEL to receive significant orders during H2FY13 considering most of the issues impacting power sectors are getting proper attention from Govt. In view of current order backlog & business outlook, we expect BHEL to deliver ~6% Revenues growth during FY13E. However, its EBITDA margins are expected reduce by 160 bps to 17.7% and APAT to decrease by 6.6% in FY13E. At CMP of Rs.220, the stock is trading at 8.1x its FY13E Earnings. We assign Hold Rating on BHEL with Target price of Rs.243 (based on 9x FY13E EPS),” says Sushil Finance research report. 

FIIs holding more than 30% in Indian cos

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More