For Bhel, 175-160 may be a very good buying zone
For mid term target of 220-247
Overall economic recovery and infra push may help
Despite near term headwinds
CMP: 178
Buy near : 175-160
TGT: 192-202-220-247 (1-6M)
TGT: 266-290-300-315 (12-24M)
TSL<155
Note: Consecutive closing below 160, Bhel can further fall to 145-140* & 120-99 area, where it may be again accumulated for better investment buying average.
Q2FY16 result of Bhel was very poor and much below street expectations except on net revenue front. Q2 loss was at around Rs.205 cr against consensus of Rs.152 cr PAT (YOY-125 & QOQ-33.89 profit).
Q2FY16 EPS was at (-) 0.84 against YOY- 0.51 & QOQ- 0.14. Only silver line was its Q2 net revenue which was at Rs.5398 cr against street estimate of Rs.5650 cr (YOY-6144 & QOQ-4362).
Q2 EBITDA of Bhel was at (-) Rs.474 cr (loss) against YOY at 292 cr & QOQ at (-) 209 cr with Q2 operating margin at (-) 8% against (+) 4.7% YOY.
But on the order book side, Bhel has an cumulative outstanding order worth of Rs.1.12 lakh cr, which was slightly lower than analyst's expectations of around Rs.1.14 lakh cr.
In Q2FY16, higher operating expenses surged, but other income and tax write back limited losses. Analysts are also pointed out that, the sharp rise in "other expenses" in Q2 may be due to provisions of doubtful sundry debts and an exceptional one time accounting adjustment.
Its no doubt that Bhel is performing very poorly on nearly all financial metrics for the last few quarters despite a strong balance sheet and as a result, the scrip is already corrected by over 40% in the last nine months. Also tepid IIP data this week dragged the scrip to some extent and its now hovering near its 52 weeks low.
The poor performance may be also attributed to the revised competitive bidding mechanism of power projects and some litigation associated with it. But, this may be near term headwinds for Bhel. Being a big PSU, backed by the Govt, Bhel has strong expertise and financial muscle and is always preferred by the state discoms. Also UDAY (power sector reforms initiative by the Govt) may help Bhel indirectly in the coming days.
Infact, Bhel's recent tepid financial performance was dragged further by slow movement of orders in hand & lengthy billing cycles. It also reflects the "real" dismal picture of the state of capital goods sector, project delays, cost over runs, "unhurried pace of reforms" & past "legacy policy paralysis" issues in our country. Land is also an issue in some parts of India for the power generation & distribution companies.
While the current situation is some what gloomy for Bhel, a gradual visible recovery in economy from H2FY16 (as widely expected by the street) and the Govt/PMO's focus on infra, stalled projects, smart city etc likely to be positive factors for Bhel.
Bhel management is also very optimistic about defence orders under "Make in India: initiative by our Govt. Bhel is also expected to bag some big projects in high speed trains along with collaboration from Japanese companies.
The company has also pointed out that in spite of fierce competition in the domestic power sector amid severe market shrinkage, it maintained its leadership position with a market share of around 72% for the last two years. By expanding its various offerings, Bhel secured almost 89% of of its total orders in the power sector on EPC basis.
But higher material costs and pay hikes because of 7-th pay commission recommendation might be some of the headwinds for Bhel in the near term. That said, 7-th pay commission is also expected a overall consumption thrust in our economy and real estates may benefit immensely along with some other sectors (like automobiles, discretionary spending etc). Bhel may be an indirect beneficiary of that real estate boom (smart city & village) in our country as power is the last vital linkage of this cycle.
Looking ahead, Bhel has already good order books and it recently also own two big thermal power projects in AP (Rs.4600 cr). So, winning project order is not a big issue for Bhel in a combination of competitive & negotiated bidding, but timely execution of the same is critical. On the operating margin front, the company is confident in the long term, because of its huge capacity & scale.
Thus, with the expected pick up in the execution of big pending projects due to Govt's increased focus on it and various other reform initiatives along with the much expected power sector reforms and infra spending, we may see gradual recovery in Bhel's earnings and cash flow in the coming months.
Bhel is also planning to enter big in RE, Solar & Nuclear power. For the concept of " Shinning India", Make In India", "Smart City & Village" to be successful under "Modinomics", we need a primary raw material in abundance; i.e. "Power" and Bhel is one of such company, that could ensure its supply, being a big PSU, active in various stages of power plant with strong distribution network.
Also, Bhel being a PSU "Nava Ratna", Govt may not allow it to sell cheap in the forthcoming planned OFS.
Technically, Bhel may be in the C-Wave of the monthly EW cycle and the extended target is 175-170-160 zone, which may be a base for it in the near term as all the above bad news flow might be already discounted by the market to a great extent.
As par BG metrics and current market parameters:
(based on standalone TTM & FWD consensus EPS)
Present median valuation of Bhel may be around : 190 (FY:15/TTM)
Projected fair valuations of Bhel might be around: 240-270-300 (FY:16-18/FWD)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| BHEL | 3.8 | 140.82 | 45 | 199.38 | 180.32 | 189.85 | 232.47 | 190.15 |
| BHEL | 5.95 | 155.65 | 45 | 249.49 | 225.64 | 237.56 | 232.47 | 190.15 |
| BHEL | 7.5 | 171.55 | 45 | 280.10 | 253.33 | 266.72 | 232.47 | 190.15 |
| BHEL | 9.5 | 190.5 | 45 | 315.25 | 285.11 | 300.18 | 232.47 | 190.15 |
Analytical Charts:
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