BHEL: How far is too far? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

BHEL: How far is too far?

Mar 9, 2004

If one were to look at the performance of the stock markets over the last month, Rs 100 invested would have appreciated marginally to Rs 104 (4% gain). However, there are stocks have outperformed the benchmark index significantly during this period. We take a look at the engineering sector in general with specific mention to BHEL (Bharat Heavy Electricals Limited) and ABB, the market leaders. We also analyse the reason for this optimism and the future growth prospects

Before going any further, Rs 100 invested in ABB and BHEL would have appreciated by 5% and around 21% respectively in the last one month. Though there has not been any fundamental change in the company, it seems that lot of the rally has due to over optimism.

BHEL gained momentum on the bourses after the company declared its 9mFY04 results. The company witnessed a 15% growth in topline and a 64% increase in bottomline, beating market expectations. BHEL has shown significant improvement in its operating margins over last three-quarters of FY04. Due to substantial improvements in the EBIT margins from its industrial segment (up 670 basis points), operating margins for the nine-month period was higher by 260 basis points.

Since BHEL has exhibited the capability to install large-scale power projects, EBIT margins from the company's power business has been on higher side as compared to industry average of 8%-10% (which is the case for the companies like ABB and Siemens). The company's industrial segment that includes water treatment has better EBIT margins as compared manufacturing motors and switchgears, as these projects are highly customised.

The company has received orders worth Rs 12 bn in its last quarter as of now, out of which more than Rs 4 bn have flown in the one month. The company's orderbook stood at Rs 235 bn as on 31st December 2003, which is around 3.2x FY03 revenues. With every new order, investors seem gain confidence in the company, which sometimes is over stretched.

Comparative valuations…
(FY05E figures)ABBBHEL
Net sales (Rs bn)18.2 96.1
Operating profit margin (%)10.9%16.0%
PAT (Rs m)1,421 8,270
Net profit margin (%)7.8%8.9%
Market Cap to sales (x)1.64 1.60
P/E ratio (x)21.018.6
Orderbook (Rs bn)*11.0235.0
*as on 31st December 2003

At the current price levels of Rs 630, the stock trades at the P/E ratio of 18.6x expected FY05 earnings, which is on higher side for an engineering company. The stock is trading at the upper limit of market capitalisation to sales ratio as well. As the power sector in India grows, the order inflows for major engineering companies like BHEL are likely to keep growing going forward. But as we have been saying earlier, there is price for every business. It seems that the stock price has factored in the future growth. Going by the valuation discipline, the stock looks fully valued at current juncture.

Equitymaster requests your view! Post a comment on "BHEL: How far is too far?". Click here!


More Views on News

BHEL 2020-21 Annual Report Analysis (Annual Result Update)

Oct 19, 2021 | Updated on Oct 19, 2021

Here's an analysis of the annual report of BHEL for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of BHEL. Also includes updates on the valuation of BHEL.

BHEL Shares Tumble 18% on Disappointing March Quarter Results (Views On News)

Jun 14, 2021

BHEL's net loss narrowed to Rs 10.4 bn in the March 2021 quarter.

Infrastructure Boom Ahead. Here are 3 Ways to Play It... (Views On News)

Aug 24, 2021

India is expected to become the third largest construction market next year. For that, it needs huge investments.

G R Infraprojects Makes a Bumper Listing on Bourses. Big Gains for IPO Investors (Views On News)

Jul 19, 2021

GR Infra shares were subscribed over 100 times in its IPO.

Here's Why the Stock of Ashoka Buildcon was in Focus Today (Views On News)

Jul 13, 2021

Ashoka Buildcon shares up on bagging NHAI project.

More Views on News

Most Popular

India's Best Semiconductor Stocks Views On News (Views On News)

Jan 7, 2022

Modern wars are fought with semiconductors. India's best semiconductor stocks have big tailwinds from defence and manufacturing.

10 Indian Companies with the Fastest Growth in Dividend Payouts... (Views On News)

Jan 10, 2022

These companies have been consistently paying higher dividends for several years.

Tata Steel vs SAIL: Which Stock is Better? (Views On News)

Jan 13, 2022

With government initiatives set to boost the steel sector, find out who has a better chance of coming out on top.

Looking for Consistent Compounding Stocks? Here's a Watchlist for You (Views On News)

Jan 6, 2022

These companies have generated mind boggling returns for investors over the years.

Watch Out for these 4 Indian Companies Betting Big on EV Supply Chain (Views On News)

Jan 11, 2022

The upside in supply chain players could be huge but a delay in the transition to EVs, or any policy related hiccups could end the momentum.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jan 18, 2022 (Close)