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Analyst Research Report Snapshot


BHEL (BHEL) - Visit Note - Dated - September 18, 2013




Axis Capital Limited


18 Sep 2013





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We met industry laterals to revisit our thesis on BHEL post the stock price correction. Our negative view on the company is based on structural issues such as shrinking market pie and pricing pressure (current prices below BHEL’s breakeven). Our recent interactions reveal that worst is not over for BHEL as:  Market pie has shrunk to 8 GW in FY14 vs. earlier expectation of 15 GW. Hence pricing is unlikely to improve for BTG equipment  BHEL’s diversification initiatives are unlikely to yield desired results due to technology gaps  Balance sheet stress is increasing due to rise in bad debts as debtors worth Rs 80 bn are overdue since last 1-2 years  As per media reports, BHEL has sent legal notices to some of its private customers to recover dues (negotiations have failed) Reduce estimates, downgrade to SELL: We lower our FY14/FY15 order inflow estimates to 4.7 GW (6 GW earlier) and 5.3 GW (6 GW earlier) due to shrinking pie. We maintain our FY14 EPS and lower FY15 EPS to Rs 9 (Rs 11.5 earlier) to factor in growing concern on execution as BHEL delays deliveries to customers due to rising receivables and weak inflows over FY12-14. We also reduce our target multiple to 10x from 13x as we don’t expect any respite to decline in earnings even in FY16 and potential risk of increased bad debts. Downgrade to SELL with revised target price of Rs 90 (10x FY15E) vs. Rs 150 earlier. At CMP of Rs 136 (implies 34% downside), the stock trades at PE of 8x FY14E EPS of Rs 17.4 and 15x FY15E EPS of Rs 9. Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1144 Charanjit Singh (Vice President – Capital Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1123

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