'Underperform' rating to Bhel shares, target Rs 137 in 6 months, says Daiwa

Updated: Feb 7 2014, 14:54pm hrs
BHELBHEL?s 3Q FY14 order inflow of Rs 7,200 cr was up 2.6x y-o-y from a low base, as it received orders from power sector. PTI
Bharat Heavy Electricals Ltd (BHEL) results for the third quarter fell short of our and Bloomberg consensus forecasts. Though its order-inflow growth was strong, we are concerned by the low price levels for the orders won. Also, we are still not seeing a pick-up in BHELs execution of slow-moving orders (about 20% of its order backlog) as funding constraints have continued to affect a few private customers, keeping BHELs balance sheet under pressure.

Some relief on orders but pricing still a concern. BHELs 3Q FY14 order inflow of R7,200 crore was up 2.6x y-o-y from a low base, as it received orders from the power sector. The low pricing at which these orders are won is a concern to us. In the first nine months of FY14, the company had won orders worth R11,700 crore, up 9% y-o-y, with a 68% contribution from the power segment. No pick-up in execution. Against managements expectation of a pick-up in execution in H2, we saw Q3 FY14 revenue fall by 15.5% y-o-y to R8,630 crore; this was 9% below our forecast. The main reason was a weak financial situation at some of its customers. Also, slow-moving orders, largely from the power sector, represent about 20% of BHELs end-Q3 FY14 order backlog. Ebitda margin continued to contract.

We reaffirm our underperform rating on BHEL, as we believe the demand outlook remains challenging and competition for a limited number of orders will remain fierce. Also, risks persist to its execution and receivables (with over 50% of the latter due over 1 year). We raise our six-month target price to R137 (from R115), now based on a target PER of 10x (formerly 8x), at a 40% discount to its past-10-year average, as we see a slight improvement in visibility in the order inflow, applied to our new FY15E EPS. The main risk would be a better-than-expected order inflow over FY15.