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BHEL: Results Out, Nothing Spectacular To Report

I’d mentioned BHEL around April 2 last year, when they announced fairly good results. Today they announced their provisional results.

The EPS growth is only about 20%, from 49.3 to 57.5. Their order inflow was 35,000 cr. and is now at 50,000 cr. The book must be quite a bit more, around 60,000 cr. The current price of Rs. 1800 gives them a P/E of 30.

I don’t think it’s worth a buy. Why? My original assessment had some valid and invalid assumptions:

  • They would do around 22,000 cr. in revenue. (Sorta achieved)
  • They would grow at 30% on EPS this year (not so. EPS Growth only 20%)
  • Order book growth would increase revenue this year (not so, revenue stayed at 22K cr. Means they are at full capacity)

The overall target of Rs. 2900 in 2012 (5800 divided by 2 for bonus) probably still stands at an averaged growth of 20% a year on EPS. That gives you a Rs. 1,100 return on a 1,800 investment, which is about 60% return in four years, or about 12.5% annualised. At that rate I would not rate it high enough to be a stock pick – in fact I have my doubts about whether it would outperform the Nifty from here. (Nifty’s P/E is 20 today)

Not much to report, but interesting to see where I was right and wrong. I got into this stock at 2300 (1150 post bonus) and exited at 1650 or so, a 44% profit in four months. BHEL went phenomenally up since then and reached nearly 2800 – I missed all of that ride – and then fell back to today’s 1800 levels. It was not a momentum pick for me when I saw it, it was based on fundamentals, so I don’t particularly mind missing the upside (in fact my momentum portfolio gave me a similar upside return). I don’t like to show off – it’s not my style – but it’s heartening to know that some convictions were on the dot. Where I was wrong was in not recognising the force of the (temporary) momentum on power stocks – but who’s to predict that?

  • Shankar says:

    >Hi Deepak,

    An EPS growth of 20% is seriously not bad. And although you are a bit troubled with the P/E ratio of 30 .. i understand BHEL has always been around this mark.

    Some brokerage firms have submitted reports on BHEL. That may be a good place to start.

    Warm Regards

  • Deepak Shenoy says:

    >THe problem is the expectation in the stock – 20% is too less for the current price.

    I don’t go by brokerage reports because they use data that I don’t necessarily agree with (like Debt to Equity and all that). I would rather see one measure working – EPS growth – and compare it to P/E. I don’t think a P/E of 50 is high if the EPS growth can match it or beat it. Perhaps I sound too disappointed by a high p/e but that’s not the intention – must change my language.

    Historical P/E doesn’t really matter in this case, it’s about living up to expectations. Look, the stock’s already down 200 points to Rs. 1600. Worth a buy? Not yet but there are some interesting developments coming along.

    1. Solar move with RIL – that’s a huge thing for the future.

    2. Increased capacity to execute (they have 85K cr. worth orders!)

    3. No slowing of order execution due to the subprime crisis. There was some news about how one of their orders failed to proceed because their customer couldn’t finance their expansion due to increased credit spreads.

  • Shankar says:

    >Hi Deepak,

    Let me run with these numbers then … I shall be putting a greater focus on 3 important things –
    1. Valuation of assets and investments
    2. Intrinsic value on a FCF base.

    Will drop a blog post on this.

    Warm Rgds

  • Deepak Shenoy says:

    >shankar: I look forward to it.

    Don’t really go with asset value or investments unless they are liquid or liquidatable. For eg. you can’t value SBI on it’s land bank because it has no way to cash in on that asset and it won’t sell it. Can’t also value holding companies for their holdings because as promoters they won’t sell subsediary stakes anytime soon.

    BHEL has a phenomenal land bank but it is of very little value (take only the cash they paid for it. They aren’t going to sell this land anytime soon. You can only take inventory as a current asset, not much else.

    FCF will be interesting, do note that as a navratna they have some governmental obligations (minimum so much % as dividend etc.).

    There is some news today of them getting 10 super-critical boiler order from the govt. I don’t know how to value that because they already have 85 K cr. of orders they aren’t able to fulfil real fast (otherwise why would they only gro 20% last year)