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Bhel: Is there value?

Sep 25, 2001

India’s No.1 engineering company, Bharat Heavy Electricals Limited (Bhel) has had a rocky ride on the bourses over the last one year. Currently it trades at Rs 127, a P/E of 11x FY01 earnings. There are differing opinions about valuations of the stock. Some feel it is under priced and some feel it is overpriced. Bhel operates 12 manufacturing facilities across the country manufacturing transformers, traction motors, thermal sets, locomotives, gas turbines, boilers and boiler auxiliaries, wind mills, heat exchangers, insulators, capacitors, compressors, oil field equipment, power devices, defence equipment, control gears, light aircrafts….and the list goes on. It is the leading equipment supplier for power generation plants in India. It has so far supplied generating equipment for 65% of India's total generating capacity.

Considering the above factors it should not be too difficult to adjudge premium valuations to this stock. However, its large size is one of the key factors, which affects its performance. The company’s performance has not been consistent in the recent past. In one quarter it earns a huge loss and in the next a huge profit. Though it is true to the nature of its business, such extreme volatility has come into Bhel’s performance only in the last couple of years.

As per our own projections, Bhel’s current valuation is only 5.2x the FY02E earnings, which is quite low and should see re-rating on this account. However, Bhel’s inconsistent performance and its PSU status mar the sentiment towards the stock.

Though Bhel may do well this year as compared to FY01 we do not see any sustainable improvement in its performance in the long term based on historical track record. It may get the contracts from NTPC as it always does, but this alone cannot be the reason to get into the stock. A company’s revenue model that is heavily dependent on the other’s requirement cannot be sustainable in the long term. In the medium term the stock would continue to see volatility based on the company’s performance in a particular quarter.

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