Despite below-par performance in terms of revenue and profit in the third quarter, Bharat Heavy Electricals’ (Bhel) earnings for the current financial year is not expected to be materially impacted.

Revenue growth was at 14%, much under street expectations of around 22-24%. Net profit growth was also a few percentage points below street at a rate of 15.6%. OPM declined by 1.3 percentage points to 20.10% mainly on account of higher provisioning for employee cost.

Revenue from power segment grew at 21.4% and industry segment grew by 16.6% during 9MFY08.
EBIT margins for industry improved to 12.7%, while margin for power sector was maintained at 21.1%.

Order inflows at Rs 36,540 crore remained strong with an 81.49% growth in the nine months of this fiscal to December, compared with Rs 20,130 crore in the previous comparable period.

The total orderbook backlog was Rs, 78,000 crore in December (Rs 46,700 crore). Although order inflows in Q3 were sequentially lower at Rs 10,930 crore, (Rs 14,6400 crore), this doesn’t pose a great concern as delays are expected in large orders and do not affect the overall growth.

BHEL is expected to end the year with an order book backlog to sales ratio of almost 4 times. Order execution remains the key, but given the company’s track record, the share performance is not expected to be affected.

Clearly, the slip in the third quarter is an exception. Access to supercritical orders, improving efficiency metrics vis-à-vis Chinese rivals means the consensus CAGR of 28% during FY07-10 and rise in operating margins from 19% now to around 22% by FY10 reinforces confidence.

While there are no express concerns about Bhel’s business outlook, valuations remain high. At the current market price of Rs 2,092.30, it trades at 32x its FY08 annualised earnings of Rs.65 and is a hot pick within the sector.

One can stay invested and given the current market conditions, take fresh positions at appropriate buying levels.

Source : Dna