Bharat Heavy Electricals (BHEL) came under profit taking on Thursday, a day after the state-run heavy equipment maker staged a massive 16 per cent rally on the back of its estimate-beating Q1 results. BHEL on Wednesday reported a surprise profit of Rs 78 crore for the June quarter on account of higher revenues from its power segment. Edelweiss Securities said beaten down and under-owned BHEL stock is “worth buying”. The brokerage termed BHEL as a “potential turnaround candidate”, citing the improvement in the company’s balance sheet. BHEL’s receivables (debtors) reduced by Rs 640 crore to Rs 34,970 crore as of June 30, 2016 compared to the March quarter, which is a big positive in BHEL’s Q1 earnings, said Edelweiss Securities. Debtors (BHEL’s) compressed by Rs 600 crore, despite turnover increasing 28 per cent year-on-year, a big positive,” it added. BHEL has made 100 per cent provision for receivables that are more than three years old. Edelweiss said this is “far superior than peers, who do it on judgmental basis”. Other expenses, which was nearly 17 per cent of BHEL’s revenue in the June quarter of last fiscal, declined by 23 per cent year-on-year in Q1 to Rs 568 crore. As a percentage of sales, it now stands at 10 per cent. A big cost reduction is seen in other expenses, which lowers break-even points,” said Edelweiss Securities. Wage revision due from January 1, 2017 is unlikely to impact BHEL’s overall cost as the company has reduced 2,600 employees in the last fiscal, the brokerage said, adding that employee count is likely to fall further. According to Edelweiss, visibility in new orders is becoming ripe for execution for BHEL. “Unlike many PSUs who lost market share to private sector, BHEL has maintained and appears well placed to benefit as more projects kick-start their execution,” the brokerage added. BHEL is among the best value picks in the entire infra basket, said Edelweiss, retaining its “buy” call on the stock (target Rs 185). Not all brokerages however are convinced about a turnaround in BHEL. Credit Suisse maintained its “underperform” rating on BHEL with a target price of Rs 100. Long streak of weak return on equity at around 5 per cent will continue and high competition will impact cost going ahead, the brokerage said.
According to Religare, BHEL’s addressable market remains under stress and at a valuation of 32 times FY18 estimated earnings per shares, the stock looks overvalued.
Religare maintained its “sell” rating on BHEL with a target price of Rs 90. As of 12.06 p.m., BHEL shares traded 2.63 per cent lower at Rs 155.45 compared to 0.14 per cent gain in the broader Nifty.