Why you should sell your BHEL shares, now

Bharat Heavy Electricals Ltd (BHEL) will announce its third-quarter results on Friday. And according to Ambit Capital, you need to sell any BHEL shares you own before that happens.

Why? Five reasons:

One, the company is expected to post poor results. Ambit estimates BHEL’s net profit at Rs 1,400 crore, lower than the market estimate of Rs 1,500 crore. That’s a piddly 3 percent growth in profit. Worse, even that growth is expected to be aided by other income. Margins are likely to be compressed as well.

Two, the company is likely to issue a gloomy outlook for the next financial year. For the current financial year ending March 2012, BHEL had offered a guidance of orders worth Rs 6,60,000 crore. However, until September, it had only managed to bag orders worth Rs 1,67,000 crore. It had earlier said it expected orders totalling Rs 78,000 crore for the quarter ending December. Given that L&T has reported a whopping 54 percent fall in orders for the same period and issued no guidance for the next financial year, expect Bhel to report orders far below expecations.

Three, BHEL’s order book quality is deteriorating. In the previous and current financial year, most orders have come from private players, which are typically utility companies with little operational experience in the power sector.

Four, Ambit says that BHEL has bid very aggressively for orders in the past two years and from the next financial year, its return ratios and margins will face severe pressure as it starts booking revenue from these orders.

And finally, BHEL is still known as a company whose chief operations centre around boiler trubine generator (BTG) manufacturing, although it is present in other areas like railways, oil and gas, etc. " Our discussions with primary data sources suggest that BHEL has missed the bus in many such verticals due to risk averseness and lack of technology tie-ups," notes Ambit in a report.

So, even though the company is trading at a 40 percent discount to its five-year average earnings multiple,prices could fall further.

So, sell BHEL as soon as you can.