BHEL: Hold/Sell on uptrends

Recommendation: Hold/Sell on uptrends

Anup Menon

After touching Rs 141 in September, the BHEL scrip has steadily declined in value. It closed the week at Rs 112. Given the company's performance, it would seem the market expected the performance to be poor. Shareholders can stay invested and use any uptrend to liquidate investments.

Earnings performance: The company's performance for the quarter ended September was not impressive. Sales revenues declined 6 per cent to Rs 1,266.60 crore compared to the corresponding previous period. In the same period, operating margins declined from 13.63 per cent to 3.17 per cent. Post-tax earnings also took a beating with a 70 per cent fall to Rs 37.80 crore.

A closer look at the company's financials indicates that while expenses have been rising, the revenues have been declining. Cash profits are down by around 54 per cent to Rs 76.70 crore. The company's cash earnings per share would work out to Rs 3.13 compared to Rs 6.84 the previous year.

Background: BHEL is a leading public sector giant that manufactures equipment for the power, transportation and oil and gas industries. It enjoys being one of the largest players in the electrical industry. However, with the economy opening up, its near monopoly position in the industry may change. Hence, future prospects would depend on the ability of the company to operate in a competitive environment and source the latest technology.

The question of managing the balance-sheet also depends on the ability to recover its dues. The company derives a major chunk of its business from the Government and related agencies, and the number of debtors is high. BHEL's ability to manage its debtors will determine future prospects.

In this backdrop, it may be difficult for the company to retain its customer by merely competing in terms of cost. A lot would depend on its ability to restructure operations to meet the changing face of the industry.