Bharat Heavy Electricals Ltd: Too much optimism

India Infoline News Service | Mumbai |

BHEL has almost doubled from its lows of August ’13 managing to outperform the Sensex by 72ppts since then.

CMP Rs200, Target Rs168, Downside 16.1%
 

BHEL has almost doubled from its lows of August ’13 managing to outperform the Sensex by 72ppts since then. The recent steep increase in its stock price has come on rising expectations of a quick revival in capex cycle, which in turn is underpinned by expectations of a stable Government in the upcoming general elections. The rally was further fuelled as the investment cycle is showing signs of bottoming out. The Q3 FY14 data on capex investment shows quarterly new projects starts were at their highest levels in 6 quarters. Also, the Cabinet Committee on Investments (CCI) has cleared ~US$80bn of projects in the last 15 months. While new projects announced by the private sector continued to decline, government capex showed a sharp increase in the quarter.

 

We believe the street is too optimistic on the rate of recovery in the investment cycle. Even assuming the formation of a stable government we expect execution would take some time due to the systemic risks present in the country. Availability of coal continues to remain a question in the near term. The recent Land Acquisition Bill has further complicated matters for Greenfield projects. In short, though we expect a stable government would accelerate approvals and clearances, challenges related to execution persist.

 

In the near term, we believe order inflow in the BTG would be limited to PSUs as the market is already facing excess capacity in the system. Pricing pressure is clearly visible in the orders won recently by BHEL. Pricing for the recent order wins has shown a decline of 20-25% over the last one year. We have revised upwards our order inflow estimate for FY15 to 10GW & Rs343bn and for FY16 to 15GW & Rs473bn. We have already built in a decent recovery in revenues and earnings despite which the stock appears extremely rich based on our assumptions. The stock is currently trading at 16.9x FY15E P/E, which is higher than its last ten year average of 15.4x. We revise our price target to Rs168 based on 13x FY16E P/E, while maintaining our SELL recommendation on the stock.


Financial summary
Y/e 31 Mar (Rs m)
FY13
FY14E
FY15E
FY16E
Revenues
484,247
396,188
372,124
392,681
yoy growth (%)
0.9
(18.2)
(6.1)
5.5
Operating profit
93,894
44,254
40,082
44,814
OPM (%)
19.4
11.2
10.8
11.4
Reported PAT
66,147
33,569
28,890
31,597
yoy growth (%)
(6.0)
(49.3)
(13.9)
9.4
EPS (Rs)
27.0
13.7
11.8
12.9
P/E (x)
7.4
14.6
16.9
15.5
Price/Book (x)
1.6
1.5
1.4
1.3
EV/EBITDA (x)
4.5
10.0
10.4
8.6
RoE (%)
23.7
10.6
8.5
8.7
RoCE (%)
33.3
15.1
12.1
12.6
Source: Company, India Infoline Research
BSE 91.35 [0.25] ([0.27]%)
NSE 91.50 [0.20] ([0.22]%)

***Note: This is a NSE Chart

 

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