BHEL announces Rs 16.28 bn buyback; should you tender your shares?

Last week, Bharat Heavy Electricals (BHEL) announced a buyback of its 189.3 million equity shares (nearly 5.16 per cent of the paid up equity share capital) at Rs 86 apiece, amounting to Rs 16.28 billion. The buyback price is at around 28 per cent premium to the current market price of Rs 67 on the Bombay Stock Exchange (BSE).

Analysts believe investors should subscribe for the buyback offer, as the long-term outlook of the business remains a concern. Given the working capital stress and the attractive buyback price, they suggest investors use the opportunity to tender their shares.

“The buyback offer is at significant premium to current market price. That apart, there is a severe working capital stress. Receivables and inventories are more than the annual revenue. One should surrender their shares,” says G Chokkalingam, founder and managing director at Equinomics Research.

On a year-to-date (YTD) basis, shares of the state-run power equipment manufacturer have dropped around 27 per cent in comparison to about 2 per cent decline in the S&P BSE Sensex, ACE Equity data show.

For the September quarter of financial year 2018 – 19 (Q2FY19), the 60 per cent jump BHEL’s net profit at Rs 1.9 billion fell short of Street expectations. Analysts at Motilal Oswal Securities, for instance, expected the company to clock in a PAT of Rs 2.9 billion. They maintain a ‘sell’ rating on the stock with a target price of Rs 60, which is nearly 43 per cent lower than the proposed buyback price.

That apart, new orders could be an issue going ahead given the upcoming general elections in the next calendar year. Analysts at Emkay Global observe that even though BHEL had reported a 159 per cent year-on-year improvement in order bookings in the first half of FY19 (H1FY19), it expects the aggregate inflows in FY19E to decline by 25 per cent to Rs 308 billion (Rs 409 billion in FY18).

“While management is expecting an order pipeline of nearly 8-10 GW (valued at nearly Rs 500 billion) in the power sector, we have factored in nearly 5GW of ordering in FY19. It is pertinent to note that order finalisations are likely to slow down in the next six months ahead of major elections in H1CY19,” the brokerage said in its report.

Analysts at ICICI Securities also believe that elevated receivables pose liquidity challenge for the company. Bhel’s total receivables in Q2FY19 have gone up to Rs 389 billion, of which, receivables for the current quarter alone stood at Rs 203.54 billion (218 days). Increase in receivables, they said, was due to deferred payments by state and central utilities.

That apart, structural challenges in the power sector continue to pose long term risks to business, analysts say. "RoE (return on equity) and RoIC (return on invested capital) at nearly 2 per cent indicates poor return ratios while the valuation is not cheap as the stock is trading at P/E multiple of 25(x)," says Satish Kumar, senior research analyst for fundamental research, at Choice Broking.