Strong order inflow, focus on execution make BHEL a contra bet

ET Intelligence Group: Over half of the analysts that track Bharat Heavy Electricals ( BHEL) are bearish on the stock considering the execution delays it has faced in the past few quarters. But going by the firm's strong December quarter performance and focus on improving project execution, investors may consider the stock as a contrarian bet.

In the December quarter, BHEL's net profit shot up nearly three times compared with the analysts' estimates due to improved order execution. Revenues grew 18% YoY. This helped its operations turn profitable compared with an operating loss in the year-ago quarter. In addition, improved collection of outstanding sales and reduced inventory took pressure off its balance sheet.

A major worry for investors over the past few quarters has been lower order inflows and delayed execution. At December-end, the outstanding order book was Rs 98,400 crore, which gives revenue visibility for the next 3.3 years.

The order flow is expected to improve since historically , the fourth quarter has shown greater order traction. The management said that it is the lowest bidder in several projects.These orders are expected in Q4FY17.

The 1.08 GW Manuguru ( Tamil Nadu) and 4GW Yadadri ( Telangana) plants are expected to get clearances soon, which would increase its execut able order backlog by `22,000 crore.

Another positive factor is a recent advisory issued by Central Electricity Authority stating that the company would no longer need the guarantee from its technology partner under a joint deed of undertaking. Earlier, collaborators had been asking for higher share of the order payments in lieu of guarantee, which affected BHEL's margin. With the latest advisory , the company will be able to save on these costs.

At Rs 156.2, stock's at 21 times FY18 projected earnings -a 11% premium to its five-year average. Given a higher order execution and possible pickup in order flow, the stock may gain investors' attention.