Reduce BHEL: Way2Wealth

Way2Wealth is bearish on BHEL and has recommended reduce rating on the stock in its May 25, 2012 research report.

“BHEL, as competition creeps in, the natural outcome is the end of big fat margins along with reduced market share. Bhel is currently witnessing the same pressure, with its order inflows down by 63% yoy & reduced order backlog by 18% yoy @Rs.1347bn. High execution has increased its sales by 14% but its revenue visibility has shrunk to less than 3yrs & with increased competition we expect it to be at lower levels. Of the order inflows of Rs.220bn the power sector secured orders worth Rs.140bn (2820 MW) & the remaining was secured by the Industrial sector. It failed to receive any orders from the International front.”

“Of the total order backlog for FY12 @ Rs.1347bn the Power sector comprised 80%, the Industrial sector formed 13% whereas the International sector formed the remaining. BHEL has effectively managed its high cost of materials with flat manpower cost indicating limited wage labour hiring. Tight control on its execution front has reduced its other expenditure by 9% yoy. Interest cost as % sales has reduced marginally & yoy it has dropped by 6%. Depreciation has been high by 47% as its expansion to 20GW is nearing completion. The effective rate of tax has reduced from 33% to 32% giving a resultant 17% mark up in PAT & improved margins @14.9% versus 14.5%. The management has guided for an over optimistic order inflow worth 14000MW (For FY12 the management had maintained its order inflow guidance of Rs.600bn which is c220bn), for FY13 which we are very much skeptical about. With the the bulk NTPC orders of Nabinagar (3*660MW), Raghunathpur (2*660MW), Darlipalli (2*800 MW) & Gajmara (2*800MW), which will be awarded in FY13 we assume BHEL to report order inflows in the range of 8000-9000MW. The cancelled RRVUNL order if it comes for rebidding in FY13 will be an added positive. For the transportation segment it has tied up with a technical provider for supplying of rail locomotives & metro coaches. It is also venturing in the water & the renewables segment.”

“Reduced earnings visibility, weakening order book, increased competition apart from order cancellation concerns due to a number of issues like non availability of coal, land and financing and dilemma in getting environmental clearances for the industrial projects are issues plaguing the sector currently. We have a Reduce rating on BHEL, at its CMP of Rs.209 it trades at a PE of 8x FY13E EPS of Rs.26,” says Way2Wealth research report.  

Institutional holding more than 40% in Indian cos

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