Bharat Heavy Electricals - Concerns are overdone - Standard Chartered Securities

OUTPERFORM, BHEL IN, CMP INR 183, Price Target INR 230

- Takeaways from BHEL's management meeting indicate that concerns about (1) a decline in power orders, (2) deteriorating working capital, and (3) margin pressure, are overdone.

- BHEL sees a power order pipeline of c.10GW and expects orders for the 13th plan to start in FY15. It also expects significant orders in the transportation segment.

- Management is not adopting an aggressive strategy to win bids. For the Udangudi bid, it plans to arrange financing from PFC and REC and not risk its own balance sheet.

- The company is focussing on cost optimisation and receivables management amid declining margins, and deteriorating working capital.

- IER maintains its OP rating with a PT of INR 230.

While a decline in revenues and earnings is widely expected by the market in FY13-15, we met BHEL's management to discuss investors' key concerns.

Concern #1 - BHEL is going overboard to win orders: For the Udangudi bid, management plans to arrange funding from PFC and REC, and not risks its balance sheet. It continues to maintain an average 10% advance term in its contracts. The company expects to reduce costs with increased indigenisation of technology and other measures. In addition, c.12, 000 people are retiring in the next five years.

Concern #2 - Power order pipeline is weak: BHEL sees a pipeline of c.10GW orders. It expects the orders for the 13th plan to start in FY15 and expects total orders of 100GW.

Concern #3 - Working capital stress will continue: BHEL expects working capital to stabilise from FY14 onwards. It has created a new post of ED - Receivables to recover payments. Of the total receivables of 306 days, c.160 days were for milestone-related payments.

Concern #4 - No activity in the industrial segment: BHEL expects transportation, transmission and renewables to drive orders. It plans to bid with a JV partner for two locomotive factories in Bihar. It recently signed a MoU with the railways to produce 4000EMUs over 10 years. In transmission, it has supplied equipment for PGCIL's1200KV pilot project and expects to get qualified for the 765KV transformer. Maintain OP: At 1.2x FY15E PBR, the valuations appear to have factored in the worst. IER maintains its OP rating with a PT of INR 230 (1.5x FY15E PBR).

Source : Equity Bulls

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