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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.

  • Anonymous says:

    >hi deepak,
    can u please tell me how can i buy the stocks of BHEL through online. pl. advice me the procedure since iam entirely new to this field and also iam living outside india.

    thanks in advance

  • Deepak Shenoy says:

    >If you’re in the US you can’t. Otherwise contact an internet broker like Reliance Money, Sharekhan or ICICI Direct.

  • Ganesh says:

    >I bought infosys in 2003 (before their split). Do you think it is the right time to move out of infosys and enter into BHEL for longer term.

  • Anonymous says:

    >Hello Deepak,
    Thanks for this great blog. I am planning to make some investment on MF. I have the following doubts.

    1) My 1 Lac tax saving is covered by PF/LIC/ULIP. So my aim is pure investment.
    2)In this view, which type of MF you recommend. ELSS or Diversified MF?.
    3)If ELSS are taxed on exit in coming budgets, after 3 years, I will have to pay tax. Right?
    4)Performance wise which is better? ELSS or Diversified MFs.
    5)I short listed , HDFC Tax Saver and Magnum Tax Gain Scheme ( in ELSS).
    6)If Diversified MFs are most suitable for me, can you tell few top performers.( I think SBI Magnum Contra is doing good.)

    Thanks
    Shibu

  • Deepak Shenoy says:

    >ganesh: Comparatively, I would think Infy will grow at average 25% over the next three years – and their EPS is 60 Rs. (trailing) right now. A five year 20% annualised increase gives an EPS of 150 after four years. That’ll translate to a price of 3000 at P/E 20.

    Not considering acquisitions for which they have a 4000 cr. kitty. The trailing P/E is about 33 right now. I would say that BHEL looks more attractive right now, with its lower P/E and more visible earnings.

    Disclosure: I own BHEL, I don’t own Infy.

  • Deepak Shenoy says:

    >Shibu: If your 80C investments are done don’t bother with ELSS. diversified MFs and index funds have done better.

    There’s HDFC Index Fund which has done well, and on the diversified side, SBI Magnum contra, DSPML TIGER, Magnum Global, HDFC Equity are good.

  • hari says:

    >Hi Deepak,

    The market is highly volatile.But Bharti is still not within the price range I wanted to buy. In such a case what is your advice.Shall I wait or buy it at the current market price. Secondly I own Wipro shares. Is it better to exit it and enter BHEL or TCS.

    Which do you prefer. Also for BHEL is there a current price we can wait so that we can buy it.IS it less than 2000?

    Thanks
    Hari

  • hari says:

    >Hi Deepak,

    Hope you dount mind. If we take the record for tax saving funds along with Equity Diversified Funds,the record clearly shows that ELSS have performed better.
    Its not that I have any special affinity towards them.but I think they have performed better.

    Regards
    Hari

  • Deepak Shenoy says:

    >hari: Bharti is expensive and I’m not tracking it right now. I’d wait for 4Q earnings before I made a decision.

    BHEL: I’d expect the price to go up about 30% from here, to about 2800 or so by mid 2008. Post bonus the one year target will be about 1400.

    ELSS Funds: I just checked HDFC Taxsaver and SBI Magnum Taxgain against Magnum Global, Reliance Growth and HDFC Equity. Yes, Magnum Global has done excellently but it still doesn’t beat diversified funds. Except for one year returns, Magnum Global and Reliance Growth seem to beat the returns of this fund (if you consider dividend payout as one time return).

    Magnum taxgain is a huge exception though – and you’ll see that the top 5 ELSS funds on average do worse than the top 5 diversified equity funds.

  • Uday says:

    >Hi Deepak,

    People say that a portfolio should be diversifies enough to cover risks. How diversified a portfolio should be ( 10 scripts or 20 or 40). I think diversified option gives less returns than betting on few good stocks. With more number of shares in portfolio more research needs to done . Can an individual investor manage the portfolio effectively? In this context do you think that Mutual funds are better? Alo, please suggest how a normal investor can mantain his/ her portfolio to get best returns.

    Thanks,
    Uday.

  • Deepak Shenoy says:

    >uday: Peter lynch had more than 1000 shares in the Magellan Fund portfolio (US) and still managed a 29% annual return!

    I think diversification just for the sake of it is worthless. Putting money in different stocks, each of which can be a big long term return, is a better strategy.

    I keep my portfolio below 20 stocks but that’s not because of any limit I impose, it’s just because these are the opportunities I’ve found.

    Mutual funds are good but if you are a smart investor you will find that stocks give better return, for much lower costs.

    Maintaining portfolio – there’s one at http://www.moneycontrol.com that might work for you.

  • sushanth says:

    >Hey Deepak,

    After reading couple of your posts, i remembered the article which i had read some time back,
    http://www.valueresearchonline.com/story/storyview.asp?str=9466

    You are reducing the flow of foolishness into the market 🙂

    Pun intended and no offense to you. I am a ardent fan of your blog and will
    continue to be indebted to you for the valuable information you provide.

    -Sushanth

  • Deepak Shenoy says:

    >sushant: You know what, I was thinking the exact same thing yesterday!

    I sat around thinking – what am I doing with this blog? Why am I trying to teach other people? Why am I not keeping quiet and just investing for myself? If other people become smart, isn’t it a problem overall, because then nobody will buy when there is no apparent value?

    I think the answer to this is that it pays in the long run to have sophisticated investors. Why?

    Because more informed investors can make better decisions. They will then come up with better ideas, and perhaps identify even better trades, and the ecosystem will develop – and this ecosystem will help me in the long run.

    I’m never going to be a “tips” person. I won’t tell anyone “buy this, sell that” and not give my reasoning – but that’s how the “fools” are trading today. Tomorrow will be the turn of informed, disciplined investing – and if I even help one person understand the concept, I will consider this a job well done.

    Overall, I’m in it for the money. Don’t ask me when and how, but I just know, instinctively, that in the long term, a concerted effort to educate investors will yield me rich returns.

    Thanks for the compliments!

  • Dhananjay says:

    >Hello Deepak,
    I reached your blog today via google search. I wanted some information & was wondering if you could help me or direct me to a place where i can get this info.

    Do we have any actual figures / statistics of a comparison between A lump sum investment in Direct Equity (Any 2-3 good cos) Vs A SIP investment in some good MF’s over a longer time horizon say 5,10,15 years or more.

    Also – Do we have any actual figures / statistics of a comparison between A lump sum investment in a Good MF Vs A SIP investment in some good MF’s over a longer time horizon say 5,10,15 years or more.
    You may take any nos of good cos, & good MF’s for the above example.

    The answers i really want (backed up by statistics) are
    1. Are SIP’s better than lumpsum inv in a MF over larger time periods.
    2. How do SIPs in MF’s stack up against direct equity inv (In good stocks) over a larger time frame.
    3. How do MF performance stack up against direct equity inv over a longer time frame.
    BTW i found yr blog to be so interesting that i have spent several hours reading it. Its great, pls keep up this good work.
    I now plan to take a regular dekko here hopefully on a daily basis.
    Thanks in advance
    Dhananjay Joag

  • Deepak Shenoy says:

    >Dhananjay, thanks for the compliments!

    I don’t have these figures, unfortunately. Would be good to build them – in fact I would love to see this myself.

    I think I shall collate this myself, perhaps need this weekend to do so. Will post an update, cheers!

  • Dhananjay says:

    >Hello Deepak,
    Thanks for the prompt reply. I will eagerly await your analysis.
    The reason for my asking for statistics was I have seen many many articles on the web about the virtues & wonders of SIP & mutual funds in general. I’ve never come across any good statistical evidence in any such articles and interviews of the representatives of the MF industry. I always seem to see such non qualified claims. The articles also usually seem one sided & biased.This leads me to begin to suspect that maybe the tom-tomming of the SIP concept is used more as a marketing tool to lure investors.
    Comparing and understanding returns on a lumpsum investment is much easier for even a common man. But calculating the returns of SIP and then comparing them with other instruments is not very easy.

    Thanks & regards,
    Dhananjay

  • Sivaprakasam says:

    >< --- Overall, I'm in it for the
    money —>
    Who knows you can do what Shabeer Bhatia did for HOTMAIL-u can sell this BLOG to someone (just joking).

  • Deepak Shenoy says:

    >Siva: That would be nice 🙂 But if I do make it a business (not hte blog, the investor education and analysis bits) that will be a sellable entity.

  • anu says:

    >hi
    i want to invest in shares n MF..but have no idea can u help me to get in this whole thing….
    thanks…