In a recent presentation, Bharat Heavy Electricals Ltd (Bhel) indicated that its share of orders for power equipment during the 12th Plan has inched up marginally when compared with that in the 11th Plan. More interesting is the fact that the share of the much-feared Chinese players has declined. But valuations of Bhel are moving southwards.
While brokerages have a “buy” recommendation for the stock, most have revised the “target price” downwards by 20-25% in the last 18 months.
Also see | Tempered Growth (PDF)
The key reason is a more tempered growth rate going forward, compared with the last five years. Incremental capacity addition in the power sector during the 13th Plan from the 12th Plan is expected to be flattish, compared with the 30% growth seen from the 11th to the 12th Plan. With the addressable market remaining flat, increased competition will impact its market share in the tendered space. News reports of global giants such as the new Alstom-Shanghai Electric combine entering the coal-fired boilers business in the long term seem to threaten Bhel’s valuation.
Meanwhile, an inflationary macroenvironment, falling merchant tariffs and surging interest rates are expected to keep the private independent power producers’ (IPPs) plans in limbo in the near term. Bhel’s order inflow profile reflects this too—IPP orders dropped to comprise half its total order flow during fiscal 2011, from around 91% in the previous year. In fact, the engineering giant’s order inflows grew only marginally in the last three years.
Given the highly competitive space, Bhel’s profitability appears to have peaked in fiscal 2011, with operating margins at 21%. A report by Emkay Global Financial Services Ltd stating this adds that it expects a compounded earnings growth rate of a mere 7% from fiscal 2011 to 2013. Not surprising then that the stock has underperformed both the BSE capital goods index and the Sensex of the Bombay Stock Exchange (BSE) since January, and has registered negative returns. The silver lining is Bhel’s shares trade at a five-year low valuation.
Graphic by Sandeep Bhatnagar/Mint
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