Stock Market

Surprise, surprise! Analysts still negative on BHEL post firm Q1

Despite posting better-than-expected June quarter, analysts are still not convinced about BHEL ‘s performance mostly concerned about its order book backlog. Shares of BHEL fell 4 percent intraday on Thursday, after it gained 15 percent yesterday.

Analysts are cautious about its execution which may remain challenging, an over-supplied boiler, turbine and generator (BTG) market pressurising on BHEL’s margins.

Bank of America Merrill Lynch has an underperform rating with a target price of Rs 98 per share stating that over 60 percent of BHEL’s order book of Rs 1.1 trn is slow moving. It feels that despite beat in Q1, sales/PAT are unlikely to exceed FY17 estimates as Q1 represents about a sixth of its full year’s sales.

It has cut FY17/18 earnings per share (EPS) by 3-8 percent due to 9 percent cut in FY17 order flow.

Agrees Jefferies that weak gross margin and order book are signs of continued challenging financial times continuing. With an underperform rating, it warns BHEL will report weak earnings ahead as provisions return in coming quarters and FY18E-19 revenue growth is at risk on weak order book.

“Provisions have been in a band of 3-10 percent in the last 5 years which could meaningfully impact numbers in the next three quarters. Given cloud on gross margins and also rising EPC component, we believe even if benefits here materialise they are likely to be offset,” it says in a note.

Credit Suisse also retains underperform rating given cautious view on ordering, competition, profitability and employee costs. Long streak of weak return on equity (RoE) of 5 percent keeps them cautious in spite of low valuations.

“Conversion of the L1 of 12 GW into orders may take time, given specific issues. Pipeline beyond current L1 seemed thin with just a few distant opportunities such as Patratu, Lara stage II etc. Other peers such as L&T, Thermax and BGR Energy have corroborated this view,” Credit Suisse says.

IDFC also maintains underperform rating on BHEL with a revised target of Rs 120 per share. It says notwithstanding BHEL’s better than expected performance in Q1FY17, its order backlog remains stressed as 45 percent of orders are non-moving.

According to the brokerage firm, order book backlog poses material risks to BHEL’s earnings estimates for FY17 and FY18. Outlook for order inflow too remains uncertain due to low PLFs (61%) for existing thermal power plants and weak financial health of most SEBs. Valuations at 26.6x FY18E earnings are expensive, especially given the uncertain outlook, it warns.

With a view that BHEL has seen a strong start but challenges remain, Macquarie maintains underperform rating with a target price of Rs 79 implying 43 percent downside. BHEL’s Q1 results were higher than expectation driven by pickup in execution and margin surprise led by cost reduction initiatives and lower provisioning it says. However structural challenges on execution (45 percent of order book slow moving) and weak margin is unlikely to change anytime soon.

JP Morgan also has an underweight rating with a target price of Rs 122 per share but raised FY17 sales estimate by 10 percent. It does not expect significant improvement under the new execution mix entailing higher EPC & supercritical projects. It says BHEL is trading expensively on P/E (38x FY18E) and in view of RoE of 3-6 percent.

Morgan Stanley feels that the stock’s spurt in reaction to the results offers an opportunity to exit. It has set a target of Rs 83 per share.

Goldman Sachs has a sell rating with a cautious view that material margin pressure will continue over the medium term. It thinks FY16 orders could take a while to reflect in revenue and a 50 percent slow-moving order book could
potentially limit near-term execution. It has revised earnings per share (EPS) for FY17-19 by -5 percent to +5 percent but target remains unchanged at
Rs 115.

However, Deutsche Bank still reiterates a buy rating and raised FY18 EPS by 13 percent and target price by 6 percent to Rs 180 per share. It says BHEL’s gross margins improved sequentially by 100 basis points (bps) which is rare in a typically weak Q1.

It is optimistic that BHEL could benefit from higher order inflows and margin expansion on better pricing and a reduction in provisions. What works in favour of BHEL, according to the brokerage firm, are orders picking up from 4-5GW annually to 12-16GW and realisations improving 25 percent while raw material  cost falls and stalled projects restarting on power sector reforms, reducing receivables.

At 13:52 hrs Bharat Heavy Electricals was quoting at Rs 158.65, down Rs 1.15, or 0.72 percent on the BSE.

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