Reduce BHEL - TP Rs.195 - Geojit BNP Paribas Financial Services

- Maintain 'reduce' rating on BHEL with a target price of Rs.195 over one year. The stock is currently traded in the range of Rs.225.

- 3QFY13 sales missed street's estimates on slower execution of orders.

- EBITDA missed estimates on the sales miss and higher other expenses arising from higher provisions.

- EBITDA miss was partly offset by lower tax rates and higher other income, including Rs.179 crore of foreign exchange gains.

- In the earnings call, management said they believed that the worst is over and they are seeing signs of revival in enquiries for new power plants from the government sector. However, the market wonders if these orders will fructify in the near to medium term as Coal India is not committing supplies for new power plants as it struggles to meet current demand.

- The outlook on BHEL would turn positive when1) there is resolution of fuel supply issues for the power sector, demonstrated by rising capacity utilization of power plants; 2) BHEL's new domestic competitors face troubles in executing their orders leading to customers switching to BHEL; and 3) reduced or no pricing pressure, with competition refraining from aggressive pricing.

- Despite cheap valuations, BHEL is expected to underperform in a liquidity-driven rally due to the poor fundamentals of the sector in which it operates.

Source : Equity Bulls

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