Chart: At three-and-a-half year low, is Bhel a buy or a sell?

Power equipment major Bhel was on Friday trading close to its 2008 lows on concerns of a drying order-book and increasing competition.

Bharat Heavy Electricals Ltd hit a 52-week low and is currently down 3.33 percent at Rs 217.70. This is the lowest level since October 2008. Moreover, the state-owned engineering company has also been underperforming the market by declining 21 percent in the past one month, as compared to a 2.2 percent fall in the Sensex.

A string of order cancellations and earnings downgrades by various brokerage houses is the reason behind the company’s woes.

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In fact just last week, the Rajasthan government scrapped tenders worth Rs 12,000 crore bagged by the power equipment giant over a year ago. State government company Rajasthan Rajya Vidyut Utpadan Nigam Ltd (RVUN) has scrapped Engineering, Procurement and Construction tenders for the new super critical units of Suratgarh and Chhabra thermal power stations.

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RVUN cancelled the separate tenders floated for two 660 mw units - each for Suratgarh and Chhabra, respectively, without specifying any particular reasons.

As a Business Line article pointed out, the biggest worry for Bhel is the trend of cancellation of bids/orders. In January, Bhel announced removing Rs 5,850 crore of orders from its books after these were cancelled by an unnamed customer. And poor order flows pose the risk of reduced revenue visibility for a company.

Morgan Stanley, in a report dated 19 April, derated the stock on concerns over slack demand for power generation capacity in India, which has resulted in an oversupply situation. Bhel, the undoubted market leader with 50 percent plus market share, is the key loser, said the report. Kotak Securities has forecast revenues of the company to decline by 3 percent in FY13 to Rs 49,000 crore and the revenue outlook beyond FY13 also appears to be subdued due to a decline in order backlog. The brokerage initiated a sell rating on the stock due to a lull in its order book.

Moreover, Bhel could have secured orders by bidding aggressively had the government provided protection against competition from Chinese companies. But with the Finance Minister Pranab Mukherjee keeping the import duty unchanged on foreign equipment, particularly that from China, Bhel is at the risk of losing market share to foreign competition.

Non-availability of coal and a funding crunch have also taken a toll on the stock. Capital goods analyst Anubhak Gupta from KimEng maintained a sell rating on the stock and cut the earnings estimate for FY13 from 20 percent to 26 percent due to long delays in orders because of non-availability of low-cost domestic coal for new power plants.

(Readers can use the scroll panel on the right side of the chart to choose different time series)

Hence unless order execution and capex cycle picks up, a further downside cannot be ruled out.