Bharat Heavy Electricals
Recommendation: Buy
CMP = Rs 2,092
Price target: Rs 2,845
Result highlights:
- For Q3FY2008, Bharat Heavy Electricals Ltd (BHEL) reported a 14.4% growth in its net sales to Rs 4,964.2 crore, whereas the net profit reported a 15.6% rise to Rs 771.9 crore. The results were below are expectations.
- The operating profit margin (OPM) for the quarter declined by 130 basis points year on year (yoy) to 20.1% mainly on account of the higher staff cost. The staff cost as percentage of sales increased by 330 basis points due to the provisions made by the company in anticipation of the wage hike to be recommended by the sixth Pay Commission. The company also made provision for productivity-linked incentives during the quarter.
- The order book continued to be robust with a 91% year-on-year (y-o-y) increase in the order inflow. Orders worth Rs 10,929 crore were booked during the quarter taking the unexecuted order book to Rs 78,000 crore, which represented a growth of 67% yoy and 7.4% qoq.
- BHEL has recently increased its capacity to 10,000 mega watt (MW) per annum. The company is now looking to increase it further to 15,000MW by 2009 and 20,000MW by 2012. BHEL has won its first order for a 600MW unit from the Tamil Nadu Electricity Board (TNEB) for Rs 2,475 crore. The company had earlier denied bidding for 600MW units, as the company's product was not approved by the Central Electricity Authority (CEA).
- BHEL has lately won an order from Reliance Industries Ltd (RIL) for setting up a 345MW captive power plant in
- In view of these events, I would maintain Buy call on BHEL with a price target of Rs 2,845 over next 6 months.
Ashok Leyland
Recommendation: Hold
CMP = Rs 37
Price target: Rs 43
Result highlights:
- The Q3FY2008 results of Ashok Leyland Ltd (ALL) were lower than our expectations, mainly on the profitability front. The net sales for the quarter grew by 1.3% y-o-y to Rs 1,800.1 crore. The quarterly net sales were ahead of our estimates and were driven by a 7.1% growth in the average realisation. The realisation increased due to the change in the product mix in favour of fully-built vehicles. The sales volume for the quarter however declined by 5.4% y-o-y.
- Adjusting for the forex gain of Rs 3.29 crore, the operating profit declined by 12% y-o-y to Rs 162.2 crore. The OPM contracted by 140 basis points to 9% in the quarter as compared with 10.4% in the corresponding quarter of the last year. The profitability was affected due to the increase in the employee costs and the other expenditure.
- The commercial vehicle segment is expected to recover only in FY2009. The company has revised its sales guidance for FY2008 to 86,000 from the earlier 90,000 vehicles. The sales in Q4FY2008 are expected to be driven by both the domestic sales and the export orders on hand.
- ALL has huge capex plan over the next two-year period. It has planned capex to expand its existing capacity and to set up a new manufacturing facility at Uttarkhand. Further investment will be required for its light commercial vehicle (LCV) joint venture (JV) plan with Nissan. All these are expected to exert pressure on its financials and restrict its profit growth.
- At the current market price of Rs 37, the stock quotes at 10.3x its FY2009E earnings and 6.8x its FY2009E earnings before interest, depreciation, tax and amortisation (EBIDTA).
- I would recommend a Hold call on ALL with a price target of Rs 43, as I expect it to rise even further.
