[T.S.R:17381] Bhel: The Chinese Are Coming

BHEL-Bleak Long Term Prospects

A combination of rising commodity price and intense competition will take away the valuation premium from BHEL.

 

Given that most of the new entrants in the fray (barring LT-MHI) failed to bag a large part of 12th Plan BTG orders, the competition is likely to be intense for balance orders. With most companies getting their plants up and running between FY12 and FY13, Bharat Heavy Electricals (BHEL) could face stiff competition with players entering into a price war to corner orders to recover initial heavy fixed costs. We perceive this as a major negative for the company.

 

RoE, revenue likely to moderate post FY13

 

BHEL's current INR 1,600 bn order book imparts it strong revenue growth visibility, and we do not forsee any down side risk for FY12E and FY13E. However, we believe the company will have to derive non-thermal revenues to support growth expectations from FY14; but, at this juncture, we do not see any major revenue stream coming to its rescue. Also, the likelihood of any of the company's new ventures (railway, solar, nuclear) yielding profits matching the sub-critical equipment profitability is bleak.

 

Under-utilised financial muscle, limited domestic growth avenues

 

Despite a strong balance sheet, BHEL has not been able to leverage its financial muscle to expand its revenue base, neither in the domestic nor in the international arena. While the company has taken several initiatives like T&D etc., we do not expect any material contribution from these avenues. Also, we

do not expect it to garner any substantial business in metro rail given localised plants of global majors like Bombardier and Alstom in India

 

Outlook: Long-term prospects bleak                    

 

BHEL has massively de-rated in the past four-five quarters owing to concerns like order intake slow down, intensifying competition, limited long-term revenue visibility, among others, and is currently trading at below its long-term average PE. We believe, the company's historical profitability in sub-critical sets will be

difficult to sustain, given industry over capacity leading to stiff competition, which is likely to dent industry profitability going ahead. Hence, we downgrade BHEL.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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