The foreign broking house has downgraded the BHEL to reduce and term the situation as last chance to exit. According to the report the engineering major has BHEL has outperformed the Sensex by 20% over the last three weeks on the back of the new restructuring plan for SEBs.
The analyst believes that while the plan will likely improve the health of the power sector, it does not change the outlook for new equipment orders and thus in their view the fuel supply concerns continue. As per the estimates, despite building in an optimistic 620 million tonne increase in coal supply per annum. over FY12-17F (at 18.3% CAGR), the analyst think the annual order inflow for BHEL is unlikely to exceed 6,000 Mw per annum. In contrast, a realistic assessment suggests that actual coal increase will be 377 million tonne (at 12.5% CAGR) implying 32,000 mw of existing orders will have to be cancelled. This is also a reason that the brokerage believes that about 28% of the BHEL order book faces risk.
It further said that rising competition and falling utilisation during times of negligible order pipeline could have a cascading effect on margins. In terms of valuations stock is expensive even on best-case coal supply outlook. Thus it maintains estimates which build in the best-case coal outlook. However despite that, the DCF-based target price works out to Rs 199 per share.
The analyst factors in deteriorating margins (down to 12-14% post FY14 from 21% currently) and medium-term order inflow of 6000 mw per annum. Given a 20% potential downside, the brokerage has downgraded BHEL to "reduce" and see the current rally as an excellent opportunity to exit the stock. It instead recommends playing the SEB reform story through power lenders such as PFC and REC.
