Fire sale: the worst time to divest BHEL

It can best be termed as a fire sale. How else can one justify the government’s decision of divesting in the power equipment major BHEL. Business Standard has reported that the Union cabinet is likely to announce a divestment of 5 percent of government’s equity in the company. This is part of the government’s plan to raise Rs 40,000 crore from divestment in the current financial year.

The divestment of BHEL is expected to raise about Rs 4,500 crore and the government’s stake post this divestment would be reduced to 62.72 percent from the current 67.72 percent. About 10 percent of the equity to be offloaded is to be reserved for employees.

The government’s timing could not have been worse. The stock has just bounced up after touching its 52 week low of Rs 1871.55 and currently trades at Rs 1,968. The stock has been falling gradually from a high of Rs 2,694 it touched in November 2010.

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Fundamentally, too, BHEL is not in the best of health. Order growth is flat, with the company still not been able to penetrate the private sector who have opted for Chinese suppliers due to their low cost and lower time for commissioning. The company is completely banking on government orders, where it gets the benefit of price preference for its growth. These orders are down to a trickle. Lack of coal linkages and a stagnation in decision making has slowed order flow for the company.

In order to catch up with the market BHEL has recently introduced cleaner and more efficient supercritical power plants. HSBC in its report on the company says that BHEL’s operating margin is expected to fall further by 3 percent to 17 percent as its order mix moves towards newer products. The report further highlights that profit growth will be flat till financial year 2014 as compared to a 30 percent growth over the last five years.

Given these fundamentals, investors would be looking at a discount to current market price, if at all they want to invest. Increased liquidity as a result of the divestment will be good enough reason for further downgrades. There is little doubt then that BHEL is one of the top losers of the day with a fall of 3.62 percent at 11.30. With the impeding downgrades the stock can crash through its 52 week low.