Bharat Heavy Electricals Limited - Macro shocks hurt growth; Quality at a discount! - 1QFY14 Results Review - ANTIQUE

BHEL reported steepest decline in profitability since 1QFY05, as revenues fell and margins were hurt on account of delayed execution, late payments and rising costs. Though company expects to end the year with similar revenues as FY13, it will depend on progress on some of slow moving projects. On the positive side, ordering environment seems to be more favourable to BHEL, with 8-10GW of orders in the tendering stage largely from government sector. However, this is grossly insufficient to turn the corners. We believe that BHEL remains a strong company with global manufacturing standards, but has been severally impacted by policy logjam in the country. BHEL's stock has seen massive de-rating in past 2-3 years and there doesn't seem to be any catalyst to reverse the process. We have remained negative on India's BTG manufacturing space for quite some time and maintain the stance.

Valuation and outlook

We have cut FY14 earnings by 16% to INR16.9, while maintaining FY15 earnings at INR 12 (lowest on the street), a further decline of 29.3%. At CMP of INR149, BHEL is trading at 8.8xFY14e and 12.4xFY15e and 1.1x P/BV of FY14e. Historically, the stock tends to trade in 1-1.5 x P/B, during extremely adverse industrial environment and hence a poor stock performance cannot be ruled out if environment doesn't improve. We maintain HOLD with target price of INR144, based on 12xFY15e (earlier INR 185, based on 15 x FY15 e earnings).

Source : Equity Bulls

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