Bharat Heavy Electrical Ltd: Still a long way to go

BHEL has rallied sharply over the last one month after a slew of measures were announced by the Government of India to boost infrastructure spending in the country.

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs144, Target Rs123, Downside 14.3%

BHEL has rallied sharply over the last one month boosted by a slew of measures announced by the Government of India to push infrastructure spending in the country; an area which had been neglected over the last one year. The government has asked Coal India to sign Fuel Supply Agreements (FSAs) with power producers and also cleared many large ticket projects. Seeking to push investment and growth, the Cabinet Committee on Investment (CCI) headed by the Prime Minister has been created to give clearances to projects, which have been stalled due to pending regulatory clearances. The recent proposal by the Heavy Industries Ministry that equipment for all future ultra mega power projects (UMPP) be mandatorily sourced from domestic manufacturers added to the positive news flow.

We believe the rally in the stock is overdone as the impact of various measures announced or proposed on BHEL would be limited in the near term. The structural issues with the sector and even with respect to BHEL still persist and we don’t expect a fast turnaround in the company. The management sees ~15GW of BTG orders being announced in FY14 and expects BHEL to receive majority of the orders. However, we believe that the new project announcements would be limited to only PSUs and would translate into ~7GW of orders for BHEL. The sector faces overcapacity over the next 2-3 years and would lead to pricing pressure in the near term. We estimate that margins for BHEL would decline sharply due to pressure on pricing, declining revenue and high fixed costs. Earnings are expected to decline 35.1% yoy in FY14 to Rs42.9bn and 12% yoy in FY15 to Rs37.7bn. Balance sheet stress is expected to amplify as receivables are expected to increase and advance from customers is in a declining trend. We maintain our Sell rating on the stock with a revised price target of Rs123.

Financial summary
Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E
Revenues 479,789 484,247 412,110 381,257
yoy growth (%) 13.3 0.9 (14.9) (7.5)
Operating profit 98,880 93,894 61,363 52,526
OPM (%) 20.6 19.4 14.9 13.8
Pre-exceptional PAT 70,400 66,147 42,932 37,761
Reported PAT 70,400 66,147 42,932 37,761
yoy growth (%) 16.3 (6.0) (35.1) (12.0)
EPS (Rs) 28.8 27.0 17.5 15.4
P/E (x) 5.0 5.3 8.2 9.3
EV/EBITDA (x) 2.9 3.1 5.0 5.1
RoE (%) 30.9 23.7 13.3 10.6
RoCE (%) 45.1 33.3 19.1 15.3
Source: Company, India Infoline Research

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