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BHEL (BHEL IN)
Upgrade to Neutral (V): Negatives in the price
Stock at its lowest PE multiple since 2003 after 19% correction
over last three months (33% in last one year) vs flat sensex
Growth in order inflow for FY12 is a challenge, acceleration in
2H could boost investor sentiment, long-term growth uncertain
Upgrade to Neutral (V) from UW(V), maintain estimates and
INR318 target
Stock trading at its lowest multiple post steep correction and we see limited
downside: We have maintained that BHEL will see flat/negative EPS growth in FY13-14
due to declining order inflow and margins. The market has factored in weak growth
prospects which have led to a stock correction of 33% over the last year, and 19% over the
last three months versus Sensex up 2%. Consensus too has now downgraded its EPS
forecasts by 5-10% for FY13-14 in last 3-6 months (refer exhibit 7).Our EPS forecasts are
still 8-9% below consensus (refer exhibit 8). The stock is now trading at PE of c10x, its
lowest multiple since 2003 (refer exhibit 2), fully pricing in the negatives we believe. We
see limited downside from the current levels.
Growth in order inflow for FY12 is a challenge, but should pick up in 2H, although
the long-term outlook remains uncertain: Post a decline in 1H (at INR168bn, -31% yoy
- refer exhibit 4), we do expect better orders in 2H (at INR375bn, up 4% yoy), but it
would be a challenge for BHEL to grow or even reach FY11 levels based on the visible
pipeline of orders (refer exhibit 5). However, an improvement in order inflow during H2
should be sentiment positive. The long-term outlook for order inflow remains uncertain
given the fuel pressure and competition from both domestic and international peers.
What could turn things around? While the company can manage its sales and earnings
from its existing order book of INR1.6trillion (3.4x FY12e revenue - refer exhibit 6) for
the next 2-3 years, the growth beyond FY14 is dependant on new order inflows over the
next 2-3 years. Things may look up after a few years if fuel (read coal) pressure eases or
alternative fuel like nuclear picks up. Additionally if BHEL is able to explore other
business segments like railways or transmission in a big way in next few years, this could
be another upside.
Upgrade to Neutral (V) from Underweight (V), maintain estimates and target price
of INR318: We use EVA to value BHEL, assuming a WACC of 11%, target sales growth
of 6%, operating return of 17% and target asset return of 1.75x, which yields our target
price of INR318 (refer exhibit 9), implying a potential return of 15% from the current
price. Our target implies a PE of 11.6x on FY13e EPS versus the current FY12PE of
10.3x. Upside risk: higher-than-expected margins from a faster-than-expected shift to
supercritical technology. Downside risk: lower than-expected order inflow intake
impacting earnings
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BHEL (BHEL IN)
Upgrade to Neutral (V): Negatives in the price
Stock at its lowest PE multiple since 2003 after 19% correction
over last three months (33% in last one year) vs flat sensex
Growth in order inflow for FY12 is a challenge, acceleration in
2H could boost investor sentiment, long-term growth uncertain
Upgrade to Neutral (V) from UW(V), maintain estimates and
INR318 target
Stock trading at its lowest multiple post steep correction and we see limited
downside: We have maintained that BHEL will see flat/negative EPS growth in FY13-14
due to declining order inflow and margins. The market has factored in weak growth
prospects which have led to a stock correction of 33% over the last year, and 19% over the
last three months versus Sensex up 2%. Consensus too has now downgraded its EPS
forecasts by 5-10% for FY13-14 in last 3-6 months (refer exhibit 7).Our EPS forecasts are
still 8-9% below consensus (refer exhibit 8). The stock is now trading at PE of c10x, its
lowest multiple since 2003 (refer exhibit 2), fully pricing in the negatives we believe. We
see limited downside from the current levels.
Growth in order inflow for FY12 is a challenge, but should pick up in 2H, although
the long-term outlook remains uncertain: Post a decline in 1H (at INR168bn, -31% yoy
- refer exhibit 4), we do expect better orders in 2H (at INR375bn, up 4% yoy), but it
would be a challenge for BHEL to grow or even reach FY11 levels based on the visible
pipeline of orders (refer exhibit 5). However, an improvement in order inflow during H2
should be sentiment positive. The long-term outlook for order inflow remains uncertain
given the fuel pressure and competition from both domestic and international peers.
What could turn things around? While the company can manage its sales and earnings
from its existing order book of INR1.6trillion (3.4x FY12e revenue - refer exhibit 6) for
the next 2-3 years, the growth beyond FY14 is dependant on new order inflows over the
next 2-3 years. Things may look up after a few years if fuel (read coal) pressure eases or
alternative fuel like nuclear picks up. Additionally if BHEL is able to explore other
business segments like railways or transmission in a big way in next few years, this could
be another upside.
Upgrade to Neutral (V) from Underweight (V), maintain estimates and target price
of INR318: We use EVA to value BHEL, assuming a WACC of 11%, target sales growth
of 6%, operating return of 17% and target asset return of 1.75x, which yields our target
price of INR318 (refer exhibit 9), implying a potential return of 15% from the current
price. Our target implies a PE of 11.6x on FY13e EPS versus the current FY12PE of
10.3x. Upside risk: higher-than-expected margins from a faster-than-expected shift to
supercritical technology. Downside risk: lower than-expected order inflow intake
impacting earnings
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