Investors can accumulate the stock of BHEL, given its consistently strong order inflows, timely capacity expansion measures to meet the increased opportunities and negligible funding issues, despite the tough environment. At the current price of Rs 1,311, the stock trades at about 15 times its expected earnings for FY10.
The market has traditionally awarded a premium to the stock as a result of its highly visible and sustainable growth prospects. Buy the stock on declines linked to broad markets to average costs.
An order backlog of Rs 1,13,600 crore, as of end-2008, speaks of the revenue potential for BHEL over the next two years, though power cuts, component shortage and delays in certain clearances led to lower revenues in the December quarter.
We believe that these issues are inevitable for a company of this size, give the customised component requirement and its dealings mostly with other government organisations such as the State electricity boards.
Operating profit margins too declined to the less than 17 per cent mark on account of higher raw material cost and employee expenses. These two parameters could see some improvement in the coming quarters.
The competitive threat from BHEL’s Chinese counterparts have receded to some extent, given the spate of quality issues raised over the past year regarding Chinese equipment. The appreciating dollar has also helped narrow the pricing gap between the local and Chinese equipment.
Our View :
The prices have run up in the last week too fast and with this speed it can touch Rs.1650. One should not invest at this high price but should start buying around 1350 levels for a decent gain over a 6 months period.