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.
Operating Profit (EBDIT)
Operating Profit Margin (%)
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
No. of Shares (eoy) (m)
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.
BHEL has announced third quarter results for the financial year 2016-2017. The company has reported an 18% YoY growth in sales, and a Rs 875 million net profit during the period. Here is our analysis of the results.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407