Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Stocks

Stock Idea: BHEL

BHEL just announced its results for 2006-07. Highlights:

Revenue: 18,702 cr. (up 29%)
Net Profit: 2,385 cr. (up 42%)
EPS: Rs. 97.4 (42%)

They want to target Rs. 44,000 cr. by 2011-12. That’s five years away, and translates to an average growth of about 20%.

Fabulous order book
BHEL has an order book of Rs. 54,000 cr. as per this interview. This is expected to complete over the next two and a half years. If you assume that will be evenly spread over, that means nearly 22,000 cr. will happen next year. That’s already 20% higher than last year!

Any further orders will increase revenues. I believe revenues will grow at 30% as said in the interview, and they’ll continue to gain more orders for further years. Their current net profit margins are around 12.75% which I believe they will maintain going forward, and if they do that their next year EPS will be around Rs. 135 per share. The one year forward P/E for the current market price of Rs. 2,250 is about 16.7.

I believe this is phenomenally cheap for a company growing at 30% in a year and 20% longer term.

Industry growth
But for this to sustain we have to be sure that this company has good long term growth prospects. The power business, which is more than 70% of the total revenues, is something the government is stressing on and there will be a massive growth in the number of mega-power projects created. This will impact BHEL because it has always been a primary provider to such projects, and has won orders consistently in spite of competition from Chinese and Indian companies.

Interest rate hike effect
Will BHEL be impacted by the recent increase in interest rates? Not directly – it has just about 550 cr. in debt, and has nearly 4200 cr. in cash. It paid just 60 cr. in interest last year, and it can wipe out debt quite easily without losing too much else. But its customers may be debt driven, though most are government bodies. The interest rate increases will not override the impetus on power, even at very high interest rates.

1:1 Bonus
BHEL has announced a 1:1 bonus, which will get confirmed in its EGM on April 30. Bonus shares give no real added value and are typically used by people to make short term capital losses (read my article) – so prices are usually pushed up after a bonus announcement and before the record date. This is entirely short term, and I would not recommend buying shares purely for bonuses unless you want to offset capital gains.

Long term value
I think BHEL is a good stock to hold for five years, especially if their margins improve. If they are able to move to 15% margins by 2012, we should have an EPS of about 286, which, at a P/E of 20 translates to about Rs. 5720 per share. (After the bonus you must divide all numbers by 1/2) That’s about a 20% annualised return over five years.

But you must re-evaluate this stock after every quarter. Make sure the reasons you invest still remain.

Disclosure: I own this stock.

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial