Kotak Securities' report on Bharat Heavy Electricals (BHEL)
"BHEL's third quarter numbers fell short of expectations on the revenue and EBITDA front. PAT was higher than expectations due to higher other income. The company is facing execution issues due to cancellation of coal blocks. Incremental positives include 1) reducing manpower costs due to retirements 2) decline in order backlog appears to have bottomed out 3) Scope for material cost savings."
Valuation and Recommendation:"In the past two years, market for power generation equipment has been dogged by fuel supply issues, poor financials of SEBs and substantial industry overcapacity. Liquidity crunch faced by the private sector would mean that bulk of the equipment in the near to medium term would be done by the public sector. This indicates that the power generation equipment market may take some time (2-3 years) to fully return to anywhere close to the heady levels of FY09-11. However, there is a positive for BHEL, in that it has traditionally enjoyed a very high market share in state promoted projects and thus could increase its share in the overall pie. Noting this, we moderate our negative stance on the company. The stock is trading at 34.3x and 19.8x FY15 and FY16 earnings respectively. We ascribe a target price of Rs 270 (Rs 250 earlier) based on 20x FY16 earnings and maintain "REDUCE", says Kotak Securities research report.
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