BHEL - CAN ONE GO CONTRARION?
By Ruma Dubey
This PSU capital goods leader of India has been hitting new lows and even now, it is languishing near its 52-week low of Rs.174.50.
This is even though the company announced better than estimated numbers for FY13. It posted a provisional net profit of Rs.6,485 crore for FY13 while most analysts were expecting it be around Rs.6000 crore. The company has also stated that its order inflow has risen 47% and its order book at the end of the fiscal was at Rs.1.15 lakh crore.
Under normal circumstances, the stock in today’s macro-economic scenario might not have warranted even a little bit of attention. But these new lows and languishing stock price has got the attention and two questions have been plaguing the otherwise disinterested investor – firstly, why is BHEL being smacked down to such levels and secondly, at these price, is it a good buy?
First question first – why is BHEL being beaten down to pulp? The first signs of trouble on the horizon came in when in Q3FY12 the company stated that it was not able to get as many orders as expected and more importantly, the company stated that orders worth Rs.5,840 crore were cancelled which led to de-growth in the order book. And these orders were cancelled as, the company stated, the customers were unable to make significant progress in getting clearances. Though the provisional numbers for FY13 were much better than expectations, in actuality, it was much lower than the net profit of Rs.7040 crore for FY12. And revenue growth was a meagre 1% so all is not yet exactly swinging back. It is just analysts who had probably gone too pessimistic and that alone cannot be the reason to conclude that the company is out of the woods.
And the second reason is linked to the first – the order book. Though the company, in its provisional numbers has indicated a 47% surge in the order book, it does not mean that all orders will get implemented or executed. Till the economy remains under pressure and infra projects continue to remain stalled, there will remain a large gap between the order book and the order implementation. Major of its orders are from the power sector and given the woes plaguing the sector currently, it could take a a while for recovery. Also one has to take the ‘China’ factor into account. Cheaper Chinese imports have scaled competition for BHEL like never before. In the 12th Plan, 79,000 MW of power capacity is expected to come up and of this, 28,840 MW orders have gone to Chinese companies. This is 36% of the total equipment order. As against this, 40% of the order, which is 31,778 MW has gone to BHEL. The demand is so high that the Chinese companies are scaling capacities - Dongfang in China is increasing its capacity from 37 GW to 42 GW, making it the largest power equipment manufacturer in China and possibly in the world. And by packaging the deal with cheap finance, China is making very deep but dangerous inroads into the Indian power sector.
The third reason is linked to the first two – due to this bleak outlook major brokerage houses have downgraded the stock. Morgan Stanley has downgraded the stock on the back of poor demand, Kotak Securities has given a sell call and expects earnings to drop in current fiscal. Ditto reports have been put out by Citigroup, HSBC Global and Motilal Oswal. There are around 24 sell or underperform ratings compared to 7 buy or outperform and post these provisional numbers, not many have changed their opinions, yet.
All in all, right now, this ‘bhelpuri’ does not look too delectable – neither tangy nor spicy; just very soggy and stale. But then the question is - can it be eaten at this new low or will it have to be thrown into the garbage? The stock is currently traded at around 7 times it valuation and this this discounting for a company which has a market cap of Rs.43,518 crore. Surely, a company like BHEL does not deserve this valuation.
There is no denying the fact that BHEL is a market leader and continues to command a 50% market share. The stock has to stop falling at some point or the other – all the fundamentals are not completely nullified – it continues to remain a company with a topline of over Rs.50,000 crore.
It is not possible to predict a bottom. Today, the intrinsic value of a company does not matter to the market – the only thing which matters is quarter to quarter profits and margins. Any company which is not able to sustain growth will be punished. Yet, despite this, the current valuations are attractive and one could accumulate at every dip. The main triggers would be news of order execution, new orders. BHEL is a good long term stock. It could reward you later as the market punishes it today. The company will recover once the power sector recovers and that might take a while; till then the stock will languish. So you buy today, do so with a long term horizon, with day-to-day falls not being an issue. Or else, there is still time for it to emerge out of the woods.