BHEL shares declined more than 3 percent intraday Friday after JP Morgan slashed 12-month target price to Rs 128 (from Rs 128 earlier) despite stock's underperformance to Sensex.
The research house cut its earnings estimates for FY18 / FY19 to 6 percent / 10 percent as it feels the replacement of old thermal plants is not as big a catalyst as it is made out to be.
The state-run power equipment maker has underperformed Sensex by around 25 percent over the last three months. FY17 order inflows/backlog were down 46/5 percent and March quarter topline growth (negative 2.2 percent) disappointed.
JP Morgan feels staff costs are likely to increase around 20 percent in FY18 following the wage settlement exercise, solar tariffs appear to have become more cost competitive relative to thermal, the capex opportunity by thermal plays for emissions reduction has seen pushback, and BHEL's diversification efforts have not produced very significant results over the last few years.
Assuming seamless execution and a green signal for implementing the around Rs 18,000 crore Yadadri (5x800MW) project near-term, BHEL may be able to deliver 8-9 percent topline growth in FY18 and EPS of around Rs 5 (around 9 percent below consensus), according to the research firm.
BHEL is L1 on the same 2.64GW tenders for some time now. Thermal tenders of another 3.72GW (all NTPC) are in the market currently. BHEL will have to win a very large share to sustain 8-9 percent growth in FY19, JP Morgan said.
BHEL's key management meeting takeaways:
1> Not more than 10 percent of order value may be booked for Bangladesh (Rs 10,000 crore) and Yadadri (Rs 18,000 crore) orders in Year 1. Assuming a two-year execution cycle for the balance of the executable order book, the research firm arrived at around Rs 31,000 crore in FY18 revenue (including excise duty).
2> Thermal prospects where BHEL is L1 are 4x660MW. NTPC has floated a notice inviting tender (NIT) for two projects, 3x800MW Patratu and 2x660MW Talcher. BHEL expects them to be awarded in FY18.
3> Gross margin may improve a bit, as a joint deed of undertaking (JDU) clause can be diluted in future.
4> Non-power businesses are still sub-scale, particularly solar (Rs 700 crore in FY17 revenue) and defence (Rs 530 crore).
According to the research house, BHEL does not have a significant competitive advantage against. peers in these areas. Orders from the government on a nomination basis can provide support to growth in future.
At 15:03 hours IST, the stock price was quoting at Rs 135.25, down Rs 1.60, or 1.17 percent on the BSE.
Posted by Sunil Shankar Matkar
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