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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.

Sales 71,832 7,758 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 (%) 15.0 10.1 
Return on capital (%)16.111.6 
Earnings per share (Rs)21.49.0 
P/E Ratio (X) 6.3 24.2 
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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More Views on News

BHEL Announces Quarterly Results (3QFY20); Net Profit Down 17.3% (Quarterly Result Update)

Feb 13, 2020 | Updated on Feb 13, 2020

For the quarter ended December 2019, BHEL has posted a net profit of Rs 2 bn (down 17.3% YoY). Sales on the other hand came in at Rs 57 bn (down 22.6% YoY). Read on for a complete analysis of BHEL's quarterly results.

BHEL Announces Quarterly Results (1QFY20); Net Profit Down 239.0% (Quarterly Result Update)

Aug 13, 2019 | Updated on Aug 13, 2019

For the quarter ended June 2019, BHEL has posted a net profit of Rs 2 bn (down 239.0% YoY). Sales on the other hand came in at Rs 45 bn (down 23.7% YoY). Read on for a complete analysis of BHEL's quarterly results.

BHEL 2017-18 Annual Report Analysis (Annual Result Update)

Dec 19, 2018 | Updated on Dec 19, 2018

Here's an analysis of the annual report of BHEL for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of BHEL. Also includes updates on the valuation of BHEL.

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