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Monday, October 27, 2008

BHEL - Results Analysis - Safe stock in bear market - Buy Recommendation

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,546
Current market price: Rs1,100

Result highlights

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The Q2FY2009 results of Bharat Heavy Electricals Ltd (BHEL) were a mixed bag. While the revenues reported were higher than our estimate, the profit was in line with our expectation.
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The revenues of the company grew by 34.7% to Rs5,342.6 crore during the quarter led by a strong 33.4% growth in the power segment revenues. The industry business has reported a 20.4% growth in its revenues to Rs1,496.1 crore. A favorable exchange rate movement also contributed positively (about 7-8%) to the sales.
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The operating profit of the company increased by 2.2% to Rs710.7 crore. The operating profit margin (OPM) stood at 13.3%. The OPM contracted by 423 basis points on a year-on-year (y-o-y) basis mainly due to a sharp 498-basis-point y-o-y increase in the raw material cost as a percentage of sales to 59.5%.
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The company would be providing Rs1,313 crore during FY2009 for the wage revision. Of this, Rs547 crore has already been provided for in H1FY2009 and the remaining amount would be provided in H2FY2009.
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The adjusted net profit of the company was up by 8.6% to Rs615.8 crore during the quarter as against our estimate of Rs635.3 crore.
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The company has booked Rs14,798 crore worth of orders in the quarter under review taking the total outstanding order book of the company to Rs104,000 crore, which translates to a book to bill ratio of 4.8x based on FY2008 revenues.
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We have changed our earnings estimates for BHEL mainly to factor in the higher revenue growth and a higher employee cost on account of wage revision. Consequently we have revised downwards our earnings estimate for FY2009 by 8.8% to Rs67.1 per share and the earnings estimate for FY2010 by 4.7% to Rs96.6 per share.
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We maintain Buy recommendation on the stock with a revised price target of Rs1,546 per share. At the current market price the stock is trading at 16.4x and 11.4x FY2009E and FY2010E earnings respectively.

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