BHEL (2QFY15) : Valuations ahead of fundamentals. Maintain SELL :: HDFC Sec, link

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Valuations ahead of fundamentals
BHEL reported yet another poor quarter with revenue
falling 31% YoY (est. 11% decline) and OPM of 4.7%.
PAT at Rs 1.2bn was way lower than our estimate of
Rs 4.8bn. Order inflow for 1HFY15 was strong at Rs
142bn, driven primarily by the 1,320MW Ennore SEZ
power plant order of Rs 78bn from Tamilnadu.
We expect order finalisations of 15-18GW for
FY16/17 (far lower than peak ordering of 25GW+).
High competitive intensity along with BHEL’s rigid
fixed costs and higher proportion of EPC orders
would ensure that BHEL’s margins will be under
pressure in the medium term
We have reduced our FY15/16E EPS by 38/33% as we
revise our FY15/16E revenue growth estimate to -
14/2% vs. -5/7% earlier. At CMP, the stock is trading
at 21x FY17E EPS which we believe builds in sharp
recovery in inflows and earnings, a scenario not yet
foreseeable in our view. Retain SELL with a TP of Rs
189/sh based on 16x FY7E EPS.
 Order inflow for 2QFY15 was Rs 130bn, driven by two
large power sector orders from TANGEDCO and GSECL.
Management mentioned about another 10 GW of
projects which will be ordered by the end of FY15. The
company is L1 in 2GW of these projects.
 Management also mentioned about their MOU with
Telangana government for 6GW of projects. Some of
these orders may be booked in FY15. We note that
Telangana state has signed MOUs for 10GW of projects
with NTPC and BHEL which is far in excess of its current
peak demand of 7.7GW.
 All India coal plant PLF has crashed to 65% in FY14 and
nearly 30GW of capacity has no long term PPA. Coal
block de-allocations have put further strain on the
sector. In such a scenario, ordering for power plants
will be muted and will be preceded by absorption of
untied capacity.
 We expect high competitive intensity to continue as
domestic BTG manufacturing capacity of 30GW is far in
excess of expected yearly ordering. The 7th pay
commission recommendations (to be implemented
from 4QFY16) will put further strain on profitability.
Retain SELL.

LINK

http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3009830