Why Bhel could fall 23 percent, now on

A shrinking order book and no significant upside - even if the government’s scheme of the buyback of PSU shares comes into play -makes Bharat Heavy Electricals Ltd a compelling name on the sell-list of major brokerages.

The latest to join the rally was Goldman Sachs which downgraded Bhel from neutral to sell with a target price of Rs 207. The stock is currently trading at Rs 207 and indicates a further fall of 23 percent in the offing. The major reason is most orders for the 12th five year plan have been given out and there is very little scope of growth in order book over the next few years.

The power equipment manufacturers have also been losing out at the face of severe competition from Chinese manufacturers. The Indian industry has been lobbying for a heavy import duty on Chinese equipments to give a better level playing field to players like Bhel. But the imposition of the duty can come only during the budget as indicated in the meeting between the prime minister and 21 power company CEOs. That would perhaps be late for Bhel to gain from orders for 12th five year plan.

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[caption id=“attachment_187518” align=“alignleft” width=“380” caption=“Goldman Sachs downgraded Bhel from neutral to sell with a target price of Rs 207.Reuters”]  [/caption]

Goldman Sachs argues that new players in the system have one or very few orders with no exit from this investment heavy business. So pricing power will be low for any new orders due to fierce competition. Goldman Sachs expects BHEL to report a 37 percent decline in order inflows this year, resulting in order book declines of 10 percent for financial year 2012 and 5 percent for 2013. Bhel’s change in order book mix from high margin subcrtical projects to low margin super critical project could also hurt the company.

Jefferies also has Bhel in its underperform list, arguing even if the company agrees to a buyback there is no upside left at this stock price levels which would make it compelling to hold the stock. The company does not have surplus cash on books and if it wants a buyback beyond 7-10 percent it will need to borrow funds. Jefferies assumes a situation where the company offers buyback upto 220 percent of shares at a 50 percent premium to current price, it doesnot indicate any upside to current prices.

Bhel is typically exposed to only the power sector. And, since the sector is facing a rough patch, the risk in investing in it is very high. It has not announced any major orders in the third quarter and so there may not be positive surprises in store.

All the issues facing the sector - like environment clearance, land acquisition or fuel shortage - are long term issues. For now, there is no trigger in sight for the company.