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Buy
Bharat Heavy Electricals (BHEL.BO)
Return Potential: 26% Equity Research
Favorable risk-reward, 3X order coverage, negligible debt; to Buy
Source of opportunity
We upgrade BHEL to Buy from Neutral with a revised 12-m TP of Rs2,530.
In the current overall environment of slow order flows and rising interest
costs, we believe BHEL offers an attractive risk-reward with: 1) more than
3X order book coverage providing strong revenue visibility, 2) negligible
debt and high cash balance, so little risk to rising rates, and 3)
valuations near 5-year low pricing in concerns over rising competition.
Despite structural concerns in the power equipment space, we turn
positive on BHEL based on its 35% valuation compression over past six
quarters and currently higher risk for peers in the sector.
Catalyst
1) On-schedule 30% capacity expansion by end-FY12 leading to revenue
boost and operating leverage benefit, 2) Implementation of import duties
on power equipment this year, 3) Delays in capacity additions from recent
private entrants, 4) Award of NTPC’s bulk orders, in which BHEL will get at
least 5 power equipment sets—about US$1 bn over next 3-6 months.
Valuation
BHEL’s valuations have historically shown a strong correlation with
capital returns; given that we estimate only marginal returns compression
over FY12E, we believe the stock’s valuations have overcorrected and look
attractive. The stock is currently trading at close to 5-year historical
trough P/E of 15X and offers an opportunity for mean reversion, in our
view. We raise our FY11E-FY13E EPS by 7%-10% to reflect better-thanexpected 4QFY11 margins. Consequently, we revise our 12-m TP to
Rs2,530 (previous TP: Rs2,432) based on 19X FY12E P/E (16% discount to
5-year mean 12-m fwd P/E). We also introduce FY14E estimates.
Key risks
1) Further increase in price-based competition; 2) Volatile commodity
prices, especially steel.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Buy
Bharat Heavy Electricals (BHEL.BO)
Return Potential: 26% Equity Research
Favorable risk-reward, 3X order coverage, negligible debt; to Buy
Source of opportunity
We upgrade BHEL to Buy from Neutral with a revised 12-m TP of Rs2,530.
In the current overall environment of slow order flows and rising interest
costs, we believe BHEL offers an attractive risk-reward with: 1) more than
3X order book coverage providing strong revenue visibility, 2) negligible
debt and high cash balance, so little risk to rising rates, and 3)
valuations near 5-year low pricing in concerns over rising competition.
Despite structural concerns in the power equipment space, we turn
positive on BHEL based on its 35% valuation compression over past six
quarters and currently higher risk for peers in the sector.
Catalyst
1) On-schedule 30% capacity expansion by end-FY12 leading to revenue
boost and operating leverage benefit, 2) Implementation of import duties
on power equipment this year, 3) Delays in capacity additions from recent
private entrants, 4) Award of NTPC’s bulk orders, in which BHEL will get at
least 5 power equipment sets—about US$1 bn over next 3-6 months.
Valuation
BHEL’s valuations have historically shown a strong correlation with
capital returns; given that we estimate only marginal returns compression
over FY12E, we believe the stock’s valuations have overcorrected and look
attractive. The stock is currently trading at close to 5-year historical
trough P/E of 15X and offers an opportunity for mean reversion, in our
view. We raise our FY11E-FY13E EPS by 7%-10% to reflect better-thanexpected 4QFY11 margins. Consequently, we revise our 12-m TP to
Rs2,530 (previous TP: Rs2,432) based on 19X FY12E P/E (16% discount to
5-year mean 12-m fwd P/E). We also introduce FY14E estimates.
Key risks
1) Further increase in price-based competition; 2) Volatile commodity
prices, especially steel.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Buy List
Coverage View: Neutral
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