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EARNINGS REVIEW
Bharat Heavy Electricals (BHEL.BO)
Buy Equity Research
Below expectations on order inflow, in line on net income; retain Buy
What surprised us
Revenue for BHEL for 1QFY12 came 9% below our and 7% below Bloomberg
consensus estimates (implying 10% yoy growth). Given better-than-expected
EBITDA margin of 15.3%, PAT was line with our and consensus estimates. The
negative surprise came in the form of order inflows at Rs25bn, implying 76%
yoy decline and resulting in a closing order book decline of 3% qoq – the first
sequential decline in BHEL’s order book in over eight years.
What to do with the stock
We upgraded BHEL to Buy in May as we believe the stock offers an
attractive risk-reward with: 1) more than 3X order book coverage
(Rs1.6tn) providing strong revenue visibility; 2) valuations near 5-year
lows, likely pricing in concerns over rising competition; and 3) relatively
close to achieving high localization for newer supercritical equipment
orders. We are concerned about low order inflows for the power segment,
but believe it still compares favorably relative to our capital goods
coverage in view of the above-mentioned reasons.
Based on 1Q results, we lower our annual order inflow forecast for FY12 to
Rs571bn, an 11% yoy decline vs. company guidance of +10% yoy. As a
result, we adjust our FY12E-14E EPS by up to 6% and revise our 12m TP to
Rs2365 (from Rs2530), based on our target P/E multiple of 17.5X (from
18.7X), 20% discount to 5-yr historical median multiple of 21X.
BHEL trades at attractive valuations: FY12E P/E of 14X which is a 34%
discount to its 5-yr trading median of 21X and close to its 5-yr trough.
Risks: Further increase in price-based competition, volatile commodity prices
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
EARNINGS REVIEW
Bharat Heavy Electricals (BHEL.BO)
Buy Equity Research
Below expectations on order inflow, in line on net income; retain Buy
What surprised us
Revenue for BHEL for 1QFY12 came 9% below our and 7% below Bloomberg
consensus estimates (implying 10% yoy growth). Given better-than-expected
EBITDA margin of 15.3%, PAT was line with our and consensus estimates. The
negative surprise came in the form of order inflows at Rs25bn, implying 76%
yoy decline and resulting in a closing order book decline of 3% qoq – the first
sequential decline in BHEL’s order book in over eight years.
What to do with the stock
We upgraded BHEL to Buy in May as we believe the stock offers an
attractive risk-reward with: 1) more than 3X order book coverage
(Rs1.6tn) providing strong revenue visibility; 2) valuations near 5-year
lows, likely pricing in concerns over rising competition; and 3) relatively
close to achieving high localization for newer supercritical equipment
orders. We are concerned about low order inflows for the power segment,
but believe it still compares favorably relative to our capital goods
coverage in view of the above-mentioned reasons.
Based on 1Q results, we lower our annual order inflow forecast for FY12 to
Rs571bn, an 11% yoy decline vs. company guidance of +10% yoy. As a
result, we adjust our FY12E-14E EPS by up to 6% and revise our 12m TP to
Rs2365 (from Rs2530), based on our target P/E multiple of 17.5X (from
18.7X), 20% discount to 5-yr historical median multiple of 21X.
BHEL trades at attractive valuations: FY12E P/E of 14X which is a 34%
discount to its 5-yr trading median of 21X and close to its 5-yr trough.
Risks: Further increase in price-based competition, volatile commodity prices
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