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Is Bhel due for a re-rating?

Is Bhel due for a re-rating?
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First Published: Wed, May 26 2010. 10 43 PM IST
Updated: Wed, May 26 2010. 10 43 PM IST
Rising costs and pricing pressures did not quite impact Bharat Heavy Electricals Ltd’s operating profitability in the March quarter. The firm contained costs and reported an operating profit margin of 20.6%, compared with 18.5% a year earlier and around 21.8% in the preceding quarter.
Raw material costs at 59.4% of sales were lower than 60.8% a year ago and 65.7% in the preceding quarter. In fact, staff costs as a percentage of sales, too, reduced sequentially and year-on-year (y-o-y). Costs on this front would have been lower in the quarter but for the firm’s provisioning of Rs453 crore towards superannuation benefits, a result of the wage settlement. In absolute terms, staff costs rose by 23.9% sequentially and 41.8% y-o-y.
But higher commodity prices in the March quarter could impact operating margins in the first quarter of fiscal 2011.
Despite stiff competition, as a leader in the engineering segment, analysts believe that there is less pressure on Bhel in terms of pricing of its contracts. However, this could be because of nearly 80% of its orders coming from the power sector, where the government contracts largely come with a price-escalation clause. But Bhel is now expanding its product portfolio in industrial segment where competition could be higher in future.
Reassurance on the outlook stems from its order book of Rs1.43 trillion as on 1 April. More importantly, in an analysts conference call, the firm indicated a minimum order accretion of around Rs60,000 crore for fiscal 2011. Further, its recent capacity expansion to 15,000MW will help ramp up execution in the next two years.
As flash results—announced on 1 April—were already a pointer to broad performance for fiscal 2010, its shares did not react to the results announcement and closed at Rs2,254 each on the Bombay Stock Exchange.
The price discounts fiscal 2011 estimated earnings around 20 times, which implies fair valuations. But as Dhirendra Tiwari, director, research, Ambit Capital Pvt. Ltd, put it: “With high return on capital employed of about 44% and cash of Rs10,000 crore, the company is due for a re-rating.”
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First Published: Wed, May 26 2010. 10 43 PM IST