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BHEL: Heady days but… - Views on News from Equitymaster
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  • Dec 20, 2000

    BHEL: Heady days but…

    India’s No.1 engineering company, Bharat Heavy Electricals Limited (BHEL) has seen its stock price surge by over 50% in the past one and a half months. Quite a comeback for a company, which reported a 90% decline in its bottomline for the first half of FY01.

    There are of course, expectations of better results in the coming December quarter. The disinvestment hope for this company has also perked up the stock. However, we reiterate that the disinvestment of BHEL anytime soon is highly unlikely. Given the company’s sheer size and area of operations, a desirable strategic partner will be difficult to find. The company also manufactures some defence related equipment for the government. So, the disinvestment of BHEL is a sensitive issue.

    Please note that we are not saying that the government will not divest stake in BHEL, but we are merely suggesting that its disinvestment is one of the trickier issues and will take some time. If in a hurry, the government decides to divest its stake in favour of the public, it will not improve the company’s sagging valuations.

    In terms of result expectations, the company is likely to turn in good second half. But given its employee size (about 54,000 employees) and its diversified operations, the company has traditionally found it difficult to raise its operating margins. The second half of FY01 is unlikely to be any different.

    (Rs m) 1HFY00 1HFY01 Change
    Sales 25,740 21,977 -14.6%
    Other Income 845 693 -18.0%
    Expenditure 23,624 21,176 -10.4%
    Operating Profit (EBDIT) 2,116 801 -62.1%
    Operating Profit Margin (%) 8.2% 3.6%  
    Interest 64 53 -17.2%
    Depreciation 784 775 -1.1%
    Profit before Tax 2,113 666 -68.5%
    Other Adjustments 0 495 -
    Tax 671 32 -95.2%
    Profit after Tax/(Loss) 1,442 139 -90.4%
    Net profit margin (%) 5.6% 0.6%  
    No. of Shares (eoy) (m) 244.8 244.8  

    It is in this light that one should evaluate the company’s valuations. The company declared a net profit of Rs 139 m in 1HFY01. Even if we assume that the BHEL will (like all previous years) add around Rs 4, 400 m to its bottomline in the second half, the expected net profit in FY01 comes to Rs 4,539 m. This is still 23% lower than FY00’s net profit.

    Given that BHEL does manage to clock a net profit of Rs 4.5 bn in FY01, its EPS would work out to be an encouraging Rs 18.5. Therefore, at Rs 160, the stock trades at a P/e multiple of 8.6 times its FY01E earnings. The valuations on this basis still look attractive and the stock could see some more upward movement.

    However, the company’s performance in the 3QFY01 will give us an indication whether the company will be really able to achieve what the bourses are expecting it to. If it does not, then the stock valuations might crumble again.

    All eyes on the December scorecard.



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