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BHEL
UW: Still unattractive despite correction
We believe the stock has further to fall; outlook to weaken
on market compression and tougher competition
Volume will likely stay flat and margins decline, leading to
flat earnings growth post FY12
Reiterate UW, lower target price to INR1,850 from INR2,300
Further to fall. Concern about order inflows has seen BHEL’s stock price decline 15%
over the last six months, underperforming the Sensex, which has fallen 7%. We believe
the stock has more downside bias on a 1-2 year horizon as we expect growth and margins
to drop due to market compression and more competition from new domestic entrants and
Chinese players.
FY13-14 growth to be flat. In an increasingly saturated market, we highlight three
reasons why BHEL is likely to underperform further: 1) order growth to remain flat
(compared to 26% CAGR over the last five years), with a downward bias if the market
declines due to fuel pressure; 2) margins to start falling from FY13 (we expect a 300bp
decline between now and FY17) given that the order book mix is shifting towards cleaner,
more efficient imported supercritical power (c3% in FY11 to 50% by FY17e); 3) EPS
growth to be flat in FY13-14 versus a c30% CAGR over the last five years. We are not
factoring in possible restrictions on coal-based power projects due to fuel shortages and
greenhouse gas emission concerns; this could put further pressure on earnings.
Strong downside risk to estimates. BHEL trades at 13.1x FY12 PE, an apparent discount
to the sector’s 16x, but on a PEG basis it carries a premium (1.3x versus the sector’s
0.8x). On the downside, if we factor in a market decline due to fuel pressure that in turn
leads to a drop in orders for BHEL (we estimate by a potential 2GW pa), our EPS
forecasts for FY13-14 would decline 4% and 7%, respectively, and our target price would
drop by INR130 (7%). We forecast zero EPS growth for FY13-14 versus consensus
estimates of 13% and 6% for FY13 and FY14 and are bearish on the long-term outlook.
Valuation. We use Economic Value Added to value BHEL, assuming a WACC of 11%
(from 10.6%). We now assume lower target sales growth of 8% (from 10%) and an
operating return of 17% (from 18.5%) to reflect the weak outlook. We lower our target
price 20% to INR1,850 (from INR2,300), providing a potential return of -1.3% (incl
dividend). Upside risks include higher than expected order inflow growth and margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BHEL
UW: Still unattractive despite correction
We believe the stock has further to fall; outlook to weaken
on market compression and tougher competition
Volume will likely stay flat and margins decline, leading to
flat earnings growth post FY12
Reiterate UW, lower target price to INR1,850 from INR2,300
Further to fall. Concern about order inflows has seen BHEL’s stock price decline 15%
over the last six months, underperforming the Sensex, which has fallen 7%. We believe
the stock has more downside bias on a 1-2 year horizon as we expect growth and margins
to drop due to market compression and more competition from new domestic entrants and
Chinese players.
FY13-14 growth to be flat. In an increasingly saturated market, we highlight three
reasons why BHEL is likely to underperform further: 1) order growth to remain flat
(compared to 26% CAGR over the last five years), with a downward bias if the market
declines due to fuel pressure; 2) margins to start falling from FY13 (we expect a 300bp
decline between now and FY17) given that the order book mix is shifting towards cleaner,
more efficient imported supercritical power (c3% in FY11 to 50% by FY17e); 3) EPS
growth to be flat in FY13-14 versus a c30% CAGR over the last five years. We are not
factoring in possible restrictions on coal-based power projects due to fuel shortages and
greenhouse gas emission concerns; this could put further pressure on earnings.
Strong downside risk to estimates. BHEL trades at 13.1x FY12 PE, an apparent discount
to the sector’s 16x, but on a PEG basis it carries a premium (1.3x versus the sector’s
0.8x). On the downside, if we factor in a market decline due to fuel pressure that in turn
leads to a drop in orders for BHEL (we estimate by a potential 2GW pa), our EPS
forecasts for FY13-14 would decline 4% and 7%, respectively, and our target price would
drop by INR130 (7%). We forecast zero EPS growth for FY13-14 versus consensus
estimates of 13% and 6% for FY13 and FY14 and are bearish on the long-term outlook.
Valuation. We use Economic Value Added to value BHEL, assuming a WACC of 11%
(from 10.6%). We now assume lower target sales growth of 8% (from 10%) and an
operating return of 17% (from 18.5%) to reflect the weak outlook. We lower our target
price 20% to INR1,850 (from INR2,300), providing a potential return of -1.3% (incl
dividend). Upside risks include higher than expected order inflow growth and margins.
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