BHEL may take 65% hit on earnings, say foreign brokerages

Foreign brokerages have turned the heat on state-owned engineering major Bharat Heavy Electricals Ltd (BHEL) over the coal block allocation scam, dubbed ‘Coalgate’. In their latest reports, Nomura and Macquarie have warned their clients BHEL might be in deep trouble due to a huge potential risk to its order book.

Nomura has said 28 per cent of BHEL’s order backlog is at risk of cancellation due to either non-availability of coal linkage or cancellation of existing linkages due to the coal allocation scam. In the worst-scenario analysis, Macquarie said, BHEL’s earnings might decline 65 per cent by 2014-15 from the 2011-12 level, while its stock price could more than halve from the current level.

Domestic brokerage Antique has also highlighted the downside risk on BHEL’s earnings and return on equity.

BHEL’s stock, however, wasn’t impacted by the spate of negative reports on Friday, as the domestic markets rallied, tracking global peers, after the European Central Bank’s bond-buying commitment.

FOREIGN BROKING HOUSES’ TAKE

Macquarie

• Earnings can decline by 65 per cent in FY15 from the FY12 level
• The stock could move closer to Rs 100 per share

Nomura

• 28% of the order backlog at risk of cancellation
• Further downside risk to earnings estimates in FY13

The company’s scrip gained on Friday3.75, or 1.86 per cent, to on Friday204.95, only slightly underperforming the Sensex, which advanced 1.95 per cent. However, since the Comptroller and Auditor General’s report on coal block allocations was tabled in Parliament on August 17, the stock has fallen almost 11 per cent, while the market has remained largely flat.

The brokerages’ negative outlook stems from the fact that some of BHEL’s private clients were named by CBI in the alleged scam and the status of coal mines allotted to them is uncertain.

“We foresee further risk to earnings estimates in FY13 and onwards due to a continued delay in new order flows and potential additional risk of order cancellation from the coal allocation scam,” Nomura has said in a report.

“BHEL is currently available at nine times FY13E earnings, which may be attractive. But, with the prospect of earnings declining by another 50 per cent from the FY13E level, the stock’s current price could be at 20 times its FY15 worst-case earnings,” says a Macquarie report, adding that the worst-case value of the company would be on Friday100 per share.