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BHEL: Is it undervalued?

Jun 22, 2000

Have the markets been fair in their valuation of Bharat Heavy Electricals Limited (BHEL), India's largest engineering company and one of the major power plant equipment manufacturers in the world.The stock currently trades at a P/E multiple of 6.3, almost one fourth the P/E enjoyed by its contemporary Asea Brown Boveri (ABB). To a certain extent the bias towards ABB is justified. BHEL is a government owned PSU with employee strength exceeding 60,000 till recently. Compared to this ABB is a well known MNC, which runs a relatively lean mean operation.

But take a look at both companies performance in FY2000. BHEL outperforms ABB in all aspects be it operating margins, net margins, returns on assets, equity or capital.

FY00 (Rs m)BHELABBBHEL/ABB
Sales 71,8327,758 9.3
Other Income 5,727 176 32.5
Expenditure 60,759 7,007 8.7
Operating Profit (EBDIT) 11,073 751 14.7
Operating Profit Margin (%)15.4%9.7% 1.6
Interest 317 61 5.2
Depreciation 1,433 158 9.1
Profit before Tax 9,323 532 17.5
Tax 3,877 160 24.2
Profit after Tax 5,446 372 14.6
Net profit margin (%)7.6%4.8%
Return on assets (%) 7.0 5.0
Return on equity (%)15.010.1
Return on capital (%)16.111.6
Earnings per share (Rs)21.49.0
P/E Ratio (X)6.324.2
Market Price (Rs)136.1217.2

In FY2000 it has trimmed its workforce by about 8,000. As a result its employee costs have declined significantly and hence it has reported better operating profits in FY2000. Still its employee costs constitute almost 21% of its turnover and about 23% of its total expenditure. In future BHEL is looking at trimming its workforce further, which would enable it to become more profitable in future.

More importantly, investments in the power sector (a major user industry) are set to surge in the next few years and BHEL is likely to benefit largely from this. Added to that, there is talk of a 51% divestment by the government, which by the way is full of hurdles.

Even then there is no reason for this engineering and power equipment behemoth to get such a shoddy treatment on the bourses.

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