BHEL: Sell

Recommendation: Sell

Anup Menon

THE Bharat Heavy Electricals stock has been on an uptrend in the recent past driven by funds pursuing the scrip, which trades at Rs 188, close to its high since the start of 2001. BHEL's performance for 2001 has not been all that impressive.

With competition in the industry on the rise and limited growth opportunities, the performance in the near term may not be impressive. On the flip side, the company has bagged several sizeable domestic and export orders.

This could lead to further appreciation in price. However, shareholders can consider liquidating their holdings at around Rs 190. Re-entry can be considered at around Rs 150.

Earnings review: The earnings performance for 2000-01 was not impressive. Sales revenues declined by around 4.30 per cent to Rs 6,322.93 crore over the previous year. The company's operating margins dropped to around 7.72 per cent from 15.75 per cent. Post-tax earnings declined nearly 50 per cent to Rs 305.99 crore. On an equity base of Rs 244.76 crore, the earnings per share works out to around Rs 12.50.

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Background: BHEL is a public sector undertaking manufacturing equipment finding application in power, transportation, and oil and gas industries, among others. Apart from being a dominant player in the world market, BHEL is a market leader in the domestic industry. Its business can be classified into the power and industrial machinery segments.

The responsibility of the power division encompasses supply and installation of equipment necessary to generate power and power plant maintenance, among others. The industrial products cater to a large array of process industries, transmission and transportation equipment. The distribution of revenues is more or less equal between the two segments.

Prospects: The prospects for the near term are not positive. However, from the medium- to long-term perspective, the outlook may improve. In terms of order book position, the company is well placed. For instance, the company bagged orders from Nalco and NTPC, among others.

It also bagged some major export orders. Therefore, the company is not likely to suffer in topline growth. Rather, it is on the cost front and profitability that the company has to concentrate and then will hold the key to sustaining valuation levels.

The company's performance also depends to a large extent on the heavy engineering industry. Given that the economy is in a slowdown, the performance of the engineering sector -- an economically sensitive industry -- may not be all that impressive. This could have a negative impact on profitability.

The rising competition is also a cause for worry. With such leading international players as ABB among others looking for a stronger foothold in the industry, there will be increasing pressure on BHEL to become operationally more efficient. If it is unable to do so, it is likely to lose its market share gradually to the technologically-efficient new entrants.

Topline growth alone is not sufficient reason for improving the company's valuations. Shareholders can liquidate their exposures by using the recent uptrend.