Stock Review: BHARAT Heavy Electricals Limited (BHEL)

BHARAT Heavy Electricals Limited (BHEL) beating its 2010-11 order inflow guidance, albeit marginally, as well as robust financial performance (provisional) for the March quarter came as a relief for the market.

The stock, which has underperformed the Sensex since September last year, has gained 4.3 per cent (over two days), as compared to a rise of 1.3 per cent in the 30-share index following the announcement on Monday.

Analysts at Sharekhan expected a 25 per cent and 29 per cent rise in BHEL's sales (to 16,980 crore) and net profit (to `2,455 crore), respectively in the March quarter (Q4FY11). However, extrapolating numbers based on the provisional figures for 201011 and actual performance in nine months ended December (9MFY11), March quarter sales increased 39 per cent at 19,340 crore, while net profit grew at a faster rate of 47 per cent to `2,808 crore, thus resulting in improvement of 83 basis points (bps) in net profit margin at 14.5 per cent.

Even if one were to adjust for the change in accounting policy on warranty provision made in March quarter, profits are up by a good 34 per cent.

More than the financial performance, the market gave athumbs-up to the company for meeting its 2010-11 order inflow guidance of `60,000 crore, and especially for exceeding its highest ever order inflow target of `23,500 crore in the March quarter .

Analysts were concerned that the company might miss the order inflow guidance due to flattish order intake at 36,530 crore in the nine months to December and slowdown in new domestic orders on account of issues related to environmental clearance, coal linkages and financial closure. Besides, NTPC's bulk order for boilers (11 x 660 mw) has been postponed to the June quarter and Rajasthan State Electricity Board's order has been delayed despite BHEL being the lowest bidder.

Meanwhile, the company is comfortably placed to report strong financial performance for the next few years due to the healthy order book to sales ratio of more than four times — its order book is estimated at over 1,60,000 crore at the end of March. However, analysts still await its future outlook for 201112, which should be available when the audited results for March quarter are announced.

Due to rising competition from Chinese and Indian private players and likely slowdown in growth of the power equipment sector (overcapacity expected by 2012-13), the company is seriously looking at foraying into non-power businesses such as captive power plants, transmission, transportation, defence, rigs, water, renewable energy equipment and non-banking financing activity . It is also open to tap global opportunities. Besides West Asia (orders worth `2,000 crore received recently), it is also looking at opportunities in Bangladesh and Indonesia.

Due to prolonged period of underperformance compared to the Sensex, the stock's current valuation at 15 times 2011-12 average estimated earnings is at a five-year low, and hence analysts find the stock attractive.