Sell BHEL - Derating not over yet - HDFC Securities

We believe that for the foreseeable future, BHEL's order inflows have peaked out in FY11 (Rs 600bn) as India's coal constraints will ensure cautious ordering from developers. Our assumption of Rs960bn inflows over FY14-16E factors in an optimistic case in our view. Margin pressure will also continue for a sustained period as increased competition and wage revision post FY17 take their toll.

At 1.3x FY14E BV, valuation has derated substantially but is still 2x the bottom valuation seen during FY98-02 period. Current valuation does not factor in sustained low RoEs (11-13%) due to capacity underutilisation, price pressures and rigid fixed costs. Further derating is imminent, in our view. We reduce our TP to Rs 147/sh (from 185) based on 1x FY15E BV and reiterate SELL.

Source : Equity Bulls

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