Company Background
Bharat Heavy Electricals Ltd (BHEL) is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHEL’s 14 manufacturing divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18 regional offices, enables the Company to promptly serve its customers and provide them with suitable products, systems and services — efficiently and at competitive prices.
CMP (Rs) 1308
52 Wk H/L 2870/984
Book Value (Rs) 241
Price Earning (FY08) 22.4
Shareholding Pattern (as of 30th Sep 2008)
Key Details
Promoters 67.7%
Financial Institutions 0.2%
Mutual Funds 6.3%
Public & Others 25.8%
Key Developments and Highlights
Performance highlights: For Q2FY09, Bharat Heavy Electrical (BHEL) reported a 35% YoY topline growth to Rs53.4bn. EBIDTA margin decreased by 423bps to 13.3% due to jump in raw material cost and employee cost. The surge in raw material cost was on back of completion of fixed cost contract which were booked during the start of the year when commodity prices were riding high. Also employee cost for FY09 is to remain high because wage provisioning of ~Rs13bn is to be done in FY09, and of that Rs.5.5bn is already done H1FY09. PAT was down 10.5% YoY for the quarter to Rs.6.16bn. Lower other income for the quarter impacted the bottom line
Strong visibility of earnings: BHEL’s current order book stands at Rs1040bn (~ 48,000MW). ~85% of the orders are from central power sector utilities (CPSUs) and the SEBS. This gives us confidence about the stability of BHEL’s order backlog. To add to it is the deficiency of the power in the country which implies that the focus of the government will remain to come over it. Fresh order flows for the quarter were Rs144bn which shows that the company is insulated from any kind of slowdown which we have seen in other companies in the engineering space. Company has guided for orders of Rs.500bn for the full year FY09 of which it has already won orders to the tune of Rs286bn in 1HFY09. The consolidated order book of Rs.1040bn stands at 5.4x FY08 sales which reinstates the strong earnings visibility of the company.
Margins would heal: BHEL’s raw material costs are impacted with a lag of 6–9 months when commodity prices move up significantly. With commodity prices cooling off, we believe the margins to start improving from Q4FY09.
Aggressive capex plans to help improve execution capacity: BHEL is done with its expansion of 10GW in FY08 and is currently working on its project of 15GW. This expansion would get completed by December 2009. The company has procured a in–principle approval to boost its capacity to 20GW by 2011. It is facing shortage of large cranes for hiring hence it has decided to buy the larger cranes. Government has also allowed BHEL to place orders for critical castings and forgings even before the orders are bagged. These actions would give a boost to its overall execution cycle.
Outlook
We have reduced are earnings estimates because of the fall in margins. But the strong order book gives us the conviction regarding the future growth of the company and hence we have given a target multiple of 20x which is over our target multiple of 18x for L&T. We believe that BHEL’s order book is dominated by govt orders (85%) where defaults are unlikely vis a vis L&T which has govt orders are to the tune of 45-47% of the total order book. At current levels we rate the stock a Market out-Performer with a reduced price target of Rs. 1940 (20xFY10E).
Source : HDFC Bank News letter
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