BHEL's buyback offer: Why investors should tender their shares

The buyback price is at around 28 per cent premium to the current market price of Rs 67 on the Bombay Stock Exchange

Bharat Heavy Electricals (Bhel) last week announced a buyback of 18.93 crore equity shares (nearly 5.16 per cent of the paid-up equity share capital) at Rs 86 a share, amounting to Rs 1,628 crore.

The buyback price is at a 25 per cent premium over the current market price of Rs 68.85 on the BSE.

Analysts believe that investors should subscribe to the buyback offer, as the long-term outlook of the business remains uncertain.

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 a significant premium to the current market price.

"Apart from that, there is a severe working capital stress.

"Receivables and inventories are more than the annual revenue. One should surrender their shares,” said 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 26 per cent in comparison to about 1 per cent rise in the S&P BSE Sensex, the ACE Equity data shows.

For the September quarter of financial year 2018-19 (Q2FY19), the 60 per cent jump in Bhel’s net profit at Rs 190 crore fell short of Street expectations.

Analysts at Motilal Oswal Securities, for instance, had estimated a net profit of Rs 290 crore.

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.

Moreover, new orders may be an issue given the upcoming general elections next 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 FY19 to decline by 25 per cent to Rs 30,800 crore (Rs 40,900 crore in FY18).

“While the management is expecting an order pipeline of nearly 8-10 Gw (valued at nearly Rs 50,000 crore) in the power sector, we have factored in nearly 5 Gw of orders in FY19.

"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 38,900 crore, of which receivables for the current quarter alone stood at Rs 20,354 crore (218 days).

Increase in receivables, they said, was due to deferred payments by state and central utilities.

Apart from that, structural challenges in the power sector continue to pose long-term risks to business, analysts say.

“Return on equity (RoE) and return on invested capital (RoIC) at nearly 2 per cent indicate poor returns ratios while the valuation is not cheap as the stock is trading at P/E multiple of 25x,” said Satish Kumar, senior research analyst for fundamental research at Choice Broking.

Photograph: PTI Photo