bharat heavy electricals ltd. (bhel) -...

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Firstcall India Equity Advisors Pvt Ltd

Bharat Heavy Electricals Ltd. (BHEL)

BUY Target Price: Rs.2700.00

CMP: Rs.2261.00 Market Cap.:Rs.1106804.72mn.

Date: 21st

November, 2009

Key Ratios:

Particulars FY09 FY10E FY11E

OPM (%) 19.41 19.87 19.27

NPM (%) 11.68 12.08 11.77

ROE (%) 24.2 22.39 21.15

ROCE (%) 37.4 34.20 32.34

P/BV(x) 7.8 6.64 5.23

P/E(x) 32.0 29.66 24.75

EV/EBDITA(x) 19.3 22.53 23.62

Debt-Equity(x) 0.01 0.01 0.01

Key Data:

Sector Capital goods

Face Value Rs.10.00

52 wk. High/Low Rs.2550/Rs.1165.65

Volume (2 wk. Avg.) 105711

BSE Code 500103

SYNOPSIS

• BHEL is one of the largest engineering and

manufacturing enterprises in India ranked among the

leading Power Plant Manufacturers in the world.

• The company’s current order book stands at Rs1250

billion, which represents 4.6x of FY09 revenue and

provides strong revenue visibility for the near-to-

medium term.

• BHEL has acquired a Rs.50,400 mn contract from

Jindal Power for setting up a 2,400-Mw thermal

power plant in Chhattisgarh.

• The company will set up a 250 MW solar

photovoltaic project at Fab City in Hyderabad.

• The company has already increased its capacity to

10GW and is looking to increase it further to 15GW

by the end of this calendar year.

• The top line and bottom-line of the company are

expected to grow at a CAGR of 25.19% and 16.08%

over FY08 to FY11E.

• Declining in commodity prices is expected to keep

the EBIDTA margins close to 20%.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]

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Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 09

3. Peer Group Comparison 16

4. Key Concerns 16

5. Financials 17

6. Charts & Graph 20

7. Outlook and Conclusion 22

8. Industry Overview 23

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Investment Highlights

• Results Update (Q2 FY10)

For the quarter ended on September 30, 2009(Standalone) the company has registered a 50.65 %

(YOY) growth in the net sales and stood at Rs.67275.20 mn from Rs.53426.30 mn of the

corresponding period of the previous year,led by a strong 23.1% increase(Y-OY) in the revenues

of the power division. Operating margins for the quarter stood at 21.22% on a y-o-y basis, the

margins increased largely on account of lower input costs, which are at 57.3% as a percentage to

sales, compared to 59.5% in the corresponding quarter last year. Even on a q-o-q basis, raw

material costs are down from 63.4% as a percentage to sales in Q1FY10. Even as metal prices

have declined sharply. The operating profit increased to Rs.14273.40 mn from Rs.10179.30 mn,

for the same quarter of last year. The net profit margin rose 12.75% for Q2FY10 in comparison to

11.53% for Q1FY09.The Company reported net profit of Rs.8578.80 mn.EPS for the quarter stood

at Rs.17.52 per equity share of Rs.10.00.

Quarterly Results –Standalone (Rs in mn)

As at Q2FY09 Q2FY10 %Change

Net Sales 53426.30 67275.20 25.92

Net Profit 6157.70 8578.80 39.32

Basic EPS 12.50 17.52 40.16

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• Margins (%):

Operating Profit Margins (OPM %)

Net Profit Margins (NPM %)

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• Strong Order Book

The company has an order book of Rs.1250000 mn, expects to bag new contracts worth about

Rs.200000 mn during 2009-10. The company has lined up a capital expenditure of Rs.24000mn

for 2009-10. It plans to manufacture equipment that could generate 15,000 Mw of electricity by

December 2009 and 20,000 Mw by 2012.In H1FY10, BHEL accounted for order inflows worth Rs.

204250mn, down about 29% y-o-y. The split in order inflow is as follows power Rs. 130900mn,

industry Rs. 67860 mn and the rest from the international segment (orders from Oman, Iraq).

Order backlog continued to be on upward trend and currently stands at 1258000mn, 21% higher

y-o-y but only 1.5% % higher q-o-q. In terms of MW, order inflow in H1FY10 stands at 8,024 MW.

90% of the orders booked by BHEL during Q1FY10 were from the private sector and overall in

H1FY10, 78% of the orders booked came from the private sector. This could mean that private

sector players are now showing more confidence in BHEL and could be moving away from

Chinese equipment. Further, this could also translate into more opportunities for BHEL, especially

in the IPP segment. However, with elections out of the way and many Govt projects in the final

stages of discussion, public sector orders could once again pick up momentum in H2FY10.

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• NTPC-BHEL to set up Rs.60, 000 mn plant in Andhra.

NTPCBHEL Power Projects Private Ltd (NBPPL), manufacturing plant of the NTPC-BHEL joint

venture, will be set up at Mannavaram in Andhra Pradesh with an investment of Rs.60000mn.

The plant is slated to be fully operational by 2014. The integrated plant, which will have capacity

to manufacture up to 5,000 Mw of power equipment annually, will come up at Mannavaram in

Chittoor district of Andhra Pradesh, about 120 km from Chennai. This will be the first integrated

plant in India to manufacture turbines, generators and boilers under one roof.

• Plans to set up 250 MW solar photovoltaic project at Hyderabad

The company will set up a 250 MW solar photovoltaic project at Fab City in Hyderabad. It will

come up with an investment of Rs.5000mn. Bharat Electronics Ltd (BEL) and BHEL have signed a

Memorandum of Understanding (MoU) to explore a 250 MW joint manufacturing facility for solar

photo voltaic cells, modules and silicon wafers project.

• Rs 1 bn exports by 2011-12

The Ranipet unit of BHEL is eyeing to increase its export business to Rs 1 billion by 2011-12 from

the current Rs 300 million. The unit is also planning to enter the US and European markets in the

next 2 years. It currently caters to countries like Malyasia, Libya, Africa, Egypt and West Asia.

• Rs.50,400 mn order from Jindal Power

BHEL has acquired a Rs.50400mn contract from Jindal Power for setting up a 2,400-Mw thermal

power plant in Chhattisgarh. As per the contract, the company will install four units of 600 Mw

each in this extension stage of Rs.50400 mn OP Jindal Super Thermal Power Plant (STPP). Its

scope of work in the contract will be of design, engineering, manufacture, supply, erection,

testing and commissioning of boilers, steam turbines, turbo-generators and associated auxiliaries

along with controls and instrumentation system. Further it is reported that presently the

company manufactures equipment that can generate 10,000 Mw of electricity annually.

• Joint venture with KEL

BHEL and manufacturing enterprise in India in the energy-related infrastructure sector and Kerala

Electrical and Allied Engineering Company Limited (KEL), a Govt. of Kerala undertaking have

signed a Memorandum of Understanding (MoU) for setting up a Joint Venture (JV).

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• Joint venture with TNEB

BHEL and TNEB had signed a Joint Venture Agreement on November 26, 2008, for setting up the

first Supercritical Thermal Power Project in Tamil Nadu.

• BHEL to invest Rs.2,500 Million

As part of its manufacturing capacity expansion programme, Bharat Heavy Electricals Limited

(BHEL) is setting up a new manufacturing plant in Tamil Nadu. The new unit is being set up by

BHEL at an initial investment of Rs.2,500 Million and the project will be funded through internal

accruals.

• Supply for 420 kN and 320 kN Porcelain Disc Insulators

It has become the only supplier in the world for 420 kN and 320 kN Porcelain Disc Insulators for

application in + 800 kV High Voltage Direct Current (HVDC) Transmission Lines. After exhaustive

R&D efforts, BHEL has successfully designed, developed and tested these insulators at STRI,

Ludvika, Sweden, the only internationally accredited laboratory equipped for testing of such

insulators in the world.

• BHEL Wins Four Major Contracts in a row cumulatively valued at Rs.70,000 Million

Against International Competitive Bidding (ICB), BHEL has bagged four major contracts from

various customers for the supply and installation of main plant equipment for thermal power

projects. The projects, with a cumulative capacity of 3,250 MW, are located in Madhya Pradesh,

Uttar Pradesh, Tamil Nadu and Maharashtra.

• Expansion plans

The company's equipment share in current installed capacity of about 140,000 MW of utility sets

in the country is around 65%. BHEL plans to expand its manufacturing capacity from 10,000 MW

to 15,000 MW and are planning 20,000 MW plant by 2011-2012. 12th Five Year Plan is likely to set

target of ~95,000MW of incremental capacity and BHEL remains confident of maintaining its

market share at 60-65% in it. The expanded capacity is likely to be utilized to execute these

incremental orders. BHEL has said it would invest Rs.12.5bn to expand its capacities to the target

level of 15,000MW by end of FY10E.

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Power generation in the country received a boost with BHEL built thermal sets generating over

4% more power in fiscal 2008-09, compared to the previous fiscal.During the year, these sets

registered a record generation of 403.43 billion units of electricity against 387.71 billion units in

the year before. Significantly, this constituted 79% of the total power generated in the country

from coal-based thermal sets.

Such a massive expansion in capacity will equate to a 70 per cent share of the 100,000 MW of

additional power generating capacity proposed in the 12th Plan period. Newer plants will be set-

up, which can produce Super Critical Boilers of 660 MW and 800 MW and the Trichy plant will

have it’s annual production capacities tripled to meet burgeoning demand.

• Plans for overseas market

Over the next five-year period, in the pursuit of achieving globalisation aspirations, BHEL aims to

grow the physical exports by six times the current size. Physical exports are expected to

contribute around Rs 60000-70000 mn to the company's turnover by 2011-12. Mergers and

acquisitions route is also being pursued to avail of inorganic growth opportunities in order to

enlarge the company's operations both in domestic as well as export markets.

• Plans for nuclear power business

With regard to nuclear power business, BHEL has access to technology for manufacturing steam

turbines and turbo-generators up to a rating of 1000 MW. Currently, 80 per cent of the country's

nuclear-based electricity is from BHEL sets. The largest size executed by BHEL is 540 MWe.

• Company is looking at for expansion

Apart from introducing supercritical technology, BHEL is also ready for introduction of advanced

class gas turbines. Necessary initiatives are being put in place to gain from the emerging

opportunities in transmission and transportation business segments. Globally, distributed power

generation viz. wind energy, solar energy (photovoltaics, photothermal) and fuel-based

distributed power generation based on mini turbines and reciprocating engines is gaining

importance. To make energy supply more viable for the future and to use the energy resources

more efficiently, BHEL is engaged in efforts to remain in step with contemporary technology

trends in the international arena.

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• Planning to increase expenditure in R&D

The company’s corporate R&D will invest Rs 8 billion in research and development (R&D) during

fiscal 2009-10, 26% more than its investment of Rs 6.5 billion last fiscal.

Company Profile

BHEL is the largest engineering and manufacturing enterprise in India in the energy related

sector. BHEL manufactures over 180 products under 30 major product groups and caters to core

sectors viz., Power Generation & Transmission, Industry, Transportation, Telecommunication,

Renewable Energy, etc. The company has 14 manufacturing divisions, four Power Sector regional

centers, over 100 project sites, eight service centers and 18 regional offices. BHEL has installed

capacity of 10,000MW in power segment.BHEL supplied equipments account for more than 65%

of the total installed Thermal Generating capacity in India and contribute approx. 73% of the

Total Power Generation in the country.

Business Area

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1. Power generation

Power Generation Sector comprises Thermal, Gas, Hydro and Nuclear power plant business.BHEL-

supplied sets account for 85,786 MW or around 64% of the total installed capacity of 1,34,697 MW

in the country. Significantly, these sets generated an all-time high 454.59 Billion Units of electricity

contributing 73% of the total power generated in the country. The cumulative capacity of projects

installed worldwide have crossed 1,00,000 MW. BHEL has proven turnkey capabilities for executing

power projects from Concept to Commissioning.

The company has introduced new rating thermal sets of 270 MW, 525 MW & 600 MW in subcritical

range and possesses the technology & capability to produce large capacity thermal sets with super

critical parameters andgas turbine-generator sets. Co-generation and Combined cycle plants have

been introduced to achieve higher plant efficiencies. To make efficient use of the high ash content

coal available in India, BHEL also supplies Circulating Fluidized Bed Combustion (CFBC) boilers for

thermal plants.

The Company manufactures 220/235/500/540 MWe,nuclear turbine-generator sets. Custom-made

hydro sets of Francis, Pelton and Kaplan types for different head-discharge combinations are also

engineered and manufactured by BHEL.

The Company has proven expertise in Plant Performance Improvement through Renovation,

Modernization and Uprating of a variety of power plant equipment, besides specialized know-how

of residual life assessment, health diagnostics and life extension of plants.

BHEL built thermal sets consistently exceed the national average efficiency parameters and have

achieved the highest-ever Plant Load Factor (PLF) of 80.4% during 2007-08, which is 2.5% higher

than the national average. Operating Availability (OA) was also he highest-ever at 86.7%. BHEL is

one of the few companies worldwide, involved in the development of Integrated Gasification

Combined Cycle (IGCC) technology which would usher in clean coal technology. BHEL has set up

Asia’s first 6.2 MW IGCC power plant with an indigenously designed pressurised fluidised bed

gasifier. The company has also signed an MoU with APGENCO for setting up a 125 MW IGCC plant

at Vijayawada.

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a) Transmission:

BHEL is today a well established player in the field of power transmission with some major products

and systems in its range of manufacturing and supply. Transmission Business Group in BHEL

undertakes projects on turnkey basis covering the complete engineering, procurement, supply,

construction, commissioning and after sales,service for AC switchyards/substations upto 400KV

with capability upto 765 kV capability to conduct System studies as required for above business.

BHEL today is the market leader in turnkey substation business of 220/400 KV class and is also the

largest transformer manufacturer in the country with the distinction of being the only Indian

company in the field of HVDC technology.

b) Future Power Generation & Transmission requirements in India :

Government of India has ambitious plans of adding new generation capacities of 77577 MW in the

XIth 5-year plan (2007 to 2012) and another 82000MW is projected to be added during the XIIth 5

year plan (ending 2017). The associated transmission system for evacuation of power has been

planned and inter-regional transmission capacity has been planned to be enhanced to 37150 MW

by end of XIth plan i.e. March 2012.Major investments are planned for building high capacity

transmission highways consisting of 400KV and 765KV transmission lines and HVDC bipoles to

evacuate power from North Eastern region and Eastern regions of the country. POWERGRID, the

Central Transmission Utility in the country is also planning to move to next higher voltage for the

grid by setting up the first 1200KV transmission line by 2012-13. POWERGRID has projected that by

2025-26 there shall be around 35 nos 1200KV substations having 100,000 MVA transformation

capacity.

2. Industries

BHEL manufactures and supplies major capital equipment and systems like Captive power plants,

Centrifugal compressors, Drive Turbines, Industrial boilers and auxiliaries, Waste heat recovery

boilers, Gas turbines, Pumps, Heat exchangers, Electrical machines, Valves, Heavy castings and

forgings, Electrostatic precipitators, ID/FD fans, Seamless pipes etc. to a number of industries, like

metallurgical, mining, cement, paper, fertilizers, refineries & petro-chemicals etc., other than

power utilities. BHEL has also emerged as a major supplier of controls and instrumentation

systems, especially distributed digital control systems for various power plants and industries.

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3. Transportation

Most of the trains in Indian Railways, whether electric or diesel powered, are equipped with BHEL’s

traction propulsion system and controls. The systems supplied are both with conventional DC

drives and state-of-theart AC drives. India’s first underground metro at Kolkata runs on drives and

controls supplied by BHEL. The company also manufactures complete Rolling stock i.e. Electric

locomotives up to 5000 HP and EMU coaches and Diesel Electric locomotives from 350 HP to 3100

HP for both mainline and shunting duty applications. BHEL also undertakes retrofitting and

overhauling of rolling stock. In the area of urban transportation, BHEL is geared up for turnkey

execution of electric trolley bus systems, light rail systems and metro systems. BHEL is contributing

to the supply of electrics for EMUs for 1500V DC & 25 kV AC to Indian Railways. Almost all the

EMUs in service in India are with the electrics manufactured and supplied by BHEL.

BHEL has also diversified into the area of track maintenance machines and coach building for Indian

Railways.Today over 85% of Indian Railways, one of the largest railway networks in the world, is

equipped with traction equipment built by BHEL. The range includes traction motors, traction

generators/alternators, transformers, sub-station equipment, vacuum circuit breakers, locomotive

bogies, smoothing reactors, exciters, converters, inverters, choppers and associated control

equipment, viz. master controllers, HSCBs, chopper controllers brake and door equipment,

electronic controls including software based controls extending to rolling stock and other transport

applications. Diesel Multiple Units, underground Metro-rail system at Calcutta, Electric Multiple

Unit (EMU) services at Mumbai, Calcutta, Chennai & Delhi operate on drives and controls supplied

by BHEL.

4. Renewable Energy

BHEL has been manufacturing and supplying a range of Renewable Energy systems and products. It

includes Solar Energy systems viz. PV modules, PV power plants, Street lighting, Solar pumps and

Solar water heating systems. A large number of small hydro power stations have also been

completed. In line with the efforts being made at national level for development of remote areas,

BHEL has commissioned six stand alone Solar Photovoltaic (SPV) power plants of 3x110 KWp and

3x55 KWp capacities in Sunderbans (West Bengal). 57 Sets of Solar PV operated petrol pumps are

being supplied to M/s HPCL to illuminate and run the company-owned petrol pumps smoothly

irrespective of Grid power outage.

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a) Oil and Gas

BHEL is supplying onshore drilling rig equipment viz. Draw works, Rotary-table, Traveling block,

Swivel, Mast and Sub structure, Mud systems and Rig electrics to ONGC and Oil India Ltd. Well

heads & X-Mas tree valves upto 10,000 psi rating for onshore as well as offshore application are

being supplied to ONGC, Oil bIndia Ltd. and Private Drilling Companies. BHEL has also supplied

Casing Support System, Mudline Suspension System and Block Valves to ONGC for offshore

application. It also has the capability to supply complete onshore Drilling rigs, Super-deep drilling

rigs, Desert rigs, Mobile rigs, Work over rigs and sub-sea well heads. Currently, BHEL is executing

orders for refurbishment and upgradation of onshore Oil Rigs from ONGC & Oil India Ltd. BHEL has

supplied GT driven centrifugal compressorpackages to GAIL India Ltd. for their gas compressor

stations for the Dahej - Vijaipur gas pipeline project

5. International Business

BHEL has, over the years, established its references in 70 countries across all inhabited continents

of the world. These references encompass almost the entire range of BHEL products and services,

covering Thermal, Hydro and Gas-based turnkey power projects, Substation projects, Rehabilitation

projects, besides a wide variety of products like Transformers, Compressors, Valves, Oil field

equipment, Electrostatic Precipitators, Photovoltaic equipment, Insulators, Heat Exchangers,

Switchgears, Castings and Forgings etc. Some of the major successes achieved by BHEL have been

in Gas-based power projects in Oman, Libya, Malaysia, Saudi Arabia, Iraq, Bangladesh, Sri Lanka,

China, Kazakhstan; Thermal power projects in Cyprus, Malta, Libya, Egypt, Indonesia, Thailand,

Malaysia,\ Sudan; Hydro power plants in New Zealand, Malaysia, Azerbaijan, Bhutan, Nepal,

Taiwan, Tajikistan, Thailand, Afghanistan; and Substation projects & equipment in various

countries. Execution of these overseas projects has also provided BHEL the experience of working

with world renowned consulting organizations and inspection agencies.n The company has been

successful in meeting then demanding requirements of international markets in terms of

complexity of work as well as technology, quality and other requirements viz. HSE requirements,

financing packages and associated O&M services, to name a few.

BHEL has proved its capability to undertake projects on fast-track basis. The company has also

established its versatility to successfully meet the varying needs of different sectors, be it captive

power, utility power generation or the oil sector. Besidesundertaking turnkey projects on its own,

BHEL also possesses the requisite flexibility to interface and complement other international

companies for large nprojects, and has also exhibited adaptability by manufacturing and supplying

intermediate products.

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The company is taking a number of strategic business initiatives to fuel further growth in overseas

business. This includes firmly establishing itself in target export markets, positioning of BHEL as a

regular EPC contractor in the global market both in utility and IPPm segments and exploring various

opportunities for setting up overseas joint ventures etc.

Joint ventures

The two Joint Venture Companies promoted by BHEL viz. “BHEL-GE Gas Turbine Services Ltd.”

(BGGTS)m with GE, USA for repair & servicing of GE designed= Gas Turbines and “Power plant

Performance Improvement Ltd.” (PPIL) with Siemens AG, Germany for plant performance

improvement of old fossil fuel power plants, have now completed ten full financial= years of

operation.

a) BGGTS

BGGTS achieved a sales turnover of Rs. 327 crore during the year 2007-08 with a profit after tax of

Rs. 46 crore. Orders for Rs. 392 crore were booked by BGGTS during the year including export

orders from overseas GE shops viz. GTS-Abu Dhabi, GE Basil don and GE-MEELSA. BGGTS

successfully completed gas turbine servicing & supply of spares to various customers like RGPPL,

ONGC-Uran, bTNEB, RIL- Jamnagar, ONGC – Hazira, IOCL, PPCL, BPCL etc. BGGTS also completed

export orders for repair of FR 6 and FR 7 gas turbine shrouds for GE-MEELSA and replacement of

damaged rotor for BPDB, Bangladesh. For the year 2007-08, BGGTS has declared a dividend of

600% thereby maintaining its consistent record of improved performance. BGGTS has also

successfully completed surveillance audit for ISO 9001, ISO 14001 & OHSAS 18001 certification.

b) PPIL

PPIL has made further progress in settlement of outstanding issues and collection of withheld

payments for pending contracts. Since, sufficient business to ensure viability of the company has

not been forthcoming both the promoter partners have mutually agreed to gradually wind up the

company.

New Joint Ventures Launched

1) During the year 2007-08 BHEL has also entered into a Joint Venture Agreement with NTPC for

setting up of a Joint venture company “NTPC BHEL Power Projects Private Limited” for carrying out

EPC contracts for Power Plants and other Infrastructure Projects in India and Abroad. The JV

Company can also take up manufacture and supply of equipments, for power plants and other

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infrastructure projects, which are not subject to any limitation or restriction under any ongoing

collaboration agreement of promoter companies. The JV Company has subsequently been

incorporated in April, 2008 and detailed business plans are being worked out.

2) A MoU has been signed between BHEL

TNEB to set up a joint venture company to build, own and operate a 1600 MW (2X800 MW) Super

Critical Thermal Power Plant at Udangudi, Tamilnadu.

3) A MoU has been signed between BHEL and Nuclear Power Corporation of India Ltd. to form a

joint venture to carry out EPC activities for power plants (conventional island only) based on atomic

energy both within the country and outside.

Company products & Services

BHEL offers over 180 products and provides systems and services to meet the needs of core sectors

like: power, transmission, industry, transportation, oil & gas, non-conventional energy sources and

telecommunication.

BHEL's product range include: Steam turbines and generators of up to 500MW capacity for utility

and combined-cycle applications; Steam turbines for CPP applications; Gas turbines of up to

260MW (ISO) rating; Custom-built conventional hydro turbines of Kaplan, Francis and Pelton types

with matching generators, pump turbines with matching motor-generators; Spherical, butterfly and

rotary valves and auxiliaries for hydro station; HSD, LDO, FO, LSHS, natural-gas/biogas based diesel

power plant; Industrial turbo-sets of ratings from 1.5 to 120MW; Steam generators for utilities,

ranging from 30 to 500MW capacity, using coal, lignite, oil, natural gas or a combination of these

fuels; Pulverized fuel fired boilers; Stoker boilers; Atmospheric fluidized bed combustion boilers;

Circulating fluidized bed combustion boilers; Waste heat recovery boiler; Boiler Auxiliaries; Heat

Exchangers & Pressure Vessels; Pumps; Power Station Control Equipment; Switchgears; Bus Ducts;

Transformers; Insulators; Capacitors; Energy Meters etc.

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Peer Group Comparison

Name of the

company

CMP(R.s)

(As on Nov

21.2009)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

BHEL 2261.00 1106084.72 64.11 35.26 8.5 170.00

ABB 766.65 162459.6 20.68 37.07 7.72 110.00

L&T 1633.00 959598.6 79.94 20.43 7.72 525.00

BEL 1572.50 125800.00 124.03 12.68 3.30 187.00

Key Concerns

• Glob economic slowdown

• Slow execution of orders

• Slow down in the Capital goods sector

• More number of players and tough competition

• In most of the business areas in which BHEL operates, the growth prospects are also dependent

on policy decisions at the national level and prevailing business trends.

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Financials

Results update 12 months ended Profit&loss Account (Standalone)

Value(Rs. in million) FY08 FY09 FY10E FY11E

Description 12m 12m 12m 12m

Net Income 193654.60 268586.30 308,874.25 379,915.32

Other Income 13962.30 7879.80 7,698.26 9,237.91

Total Income 207616.90 276466.10 316,572.51 389,153.23

Expenditure -159986.70 -224327.80 -255191.90 -315937.58

Operating Profit 47630.20 52138.30 61380.60 73215.65

Interest -354.20 -307.10 -201.23 -186.23

Gross Profit 47276.00 51831.20 61179.37 73029.42

Depreciation -2972.10 -3342.70 -3766.15 -4218.09

Profit before Tax 44303.90 48488.50 57413.22 68811.33

Tax -15710.50 -17106.40 -20094.63 -24083.97

Profit after Tax 28593.40 31382.10 37318.60 44727.37

Net profit 28593.40 31382.10 37318.60 44727.37

Equity Capital 4895.20 4895.20 4895.20 4895.20

Reserves 102846.90 124492.90 161811.50 206538.86

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 489.52 489.52 489.52 489.52

EPS(Rs) 58.41 64.11 76.24 91.37

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Quarterly ended Profit & Loss Account (Standalone)

Value(Rs. in million) 31-Mar-09 31-June-09 30-Sep-09 31-Dec-09E

Description 3m 3m 3m 3m

Net Income 108,500.50 56,714.20 67,275.20 77,366.48

Other Income 1,971.90 2,270.90 1,955.00 1,945.26

Total Income 110,472.40 58,985.10 69,230.20 79,311.74

Expenditure -88,437.90 -50,794.60 -54,956.80 -63425.04

Operating Profit 22,034.50 8,190.50 14,273.40 15,886.70

Interest -80.9 -42.8 -45.2 -47.25

Gross profit 21,953.60 8,147.70 14,228.20 15,839.45

Depreciation -1,008.30 -961 -934.1 -965.23

Profit before Tax 20,945.30 7,186.70 13,294.10 14,874.22

Tax -7,470.60 -2,480.80 -4,715.30 -5,205.98

PAT 13,474.70 4,705.90 8578.80 9668.24

Net Profit 13,474.70 4,705.90 8,578.80 9668.24

Equity Capital 4,895.20 4,895.20 4895.20 4895.20

Face Value 10.00 10.00 10.00 10.00

EPS(Rs) 27.5 9.61 17.52 19.75

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Key Ratios

Particulars FY09 FY10E FY11E

Equity Capital (Rs.mn.) 4,895.20 4,895.20 4,895.20

EBDITA Margin (%) 19.41% 19.87% 19.27%

Net Profit Margin (%) 11.68% 12.08% 11.77%

P/E (x) 23.40 29.66 24.75

ROE (%) 24.25% 22.39% 21.15%

ROCE (%) 37.28% 34.20% 32.34%

EV/EBDITA(x) 14.10 22.53 23.62

Book Value (Rs.) 264.32 340.55 431.92

P/BV (x) 5.68 6.64 5.23

Debt-Equity ratio(x) 0.01 0.01 0.01

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Charts

A) Net sales & PAT Chart

B) EV/EBITDA chart

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C) P/E Chart

D) Debt-Equity ratio chart

22


1 Year Comparative Graph

Outlook and Conclusion

• At the current market price of the stock Rs.2261, the stock trades at a P/E of 29.66 x and 24.75x

for FY10E and FY11E respectively.

• The EPS of the stock is expected to be at Rs.76.24 and Rs.91.37 for the earnings of FY10E and

FY11E respectively.

• The topline and bottom-line of the company are expected to growth a CAGR of 25.19% and

16.08% respectively over FY08 to FY11E.

• On the basis of EV/EBDITA, the stock trades at 22.53 x and 23.62 x for FY10E and FY11E

respectively.

• Price to Book Value of the stock is expected to be at 6.6 x for FY10E and 5.2 x for FY11E.

• Declining in commodity prices is expected to keep the EBIDTA margins close to 20% .

• It has witnessed a robust growth in new orders over the past 5 years.

• Its initiative in nuclear power and super critical segment as key positives for future growth.

• As the Government of India (GoI) plans to enhance total power generation capacity (~78 GW in

XIth five year plan) and renew the power transmission and distribution infrastructure of the

country, we expect the Company’s order book would get a further boost.

• Over the next five-year period, in the pursuit of achieving globalization aspirations, BHEL aims to

grow the physical exports by six times the current size. Physical exports are expected to

contribute around Rs 60000-70000 mn to the company's turnover by 2011-12.

BHEL BSE SENSEX

23


• BHEL, with its domi-nant market position and capacity expansion plans of 5 GW by 2009 end and

another 5 GW by March 2012, is well positioned to capitalize on these opportunities in the

power sector.

• We recommend to ‘BUY’ this stock with a target price of Rs.2700.00 for medium to long term.

Overview of the Capital goods & Engineering Sector

Engineering Sector: Market & Opportunities

India's engineering industry is highly competitive with a number of players in each segment. The

engineering sector has been growing, driven by growth in end user industries and the new projects

being taken up in the power, railways, infrastructure development, and private sector investments

fields amongst others. The industry attracted FDI inflows of US$ 1,196.7 million from August 1991-

July 2006.

24


India's exports of engineering goods are valued at US$ 27 billion during 2006-07 which represents a

6 per cent growth over the exports for 2005-06 (US$ 20 billion). The engineering sector accounted

for 14 per cent of the country's total exports. It is also noteworthy that 40 per cent of India's

engineering export is from the small and medium enterprises (SME) sector. According to

Engineering Exports Promotion Council (EEPC), engineering exports could touch US$ 30 billion by

2008-09. In such a scenario, India, driven by the engineering sector, will emerge as a key global

manufacturing hub

Industry demand is driven by investments in core sectors

The demand from this sector depends largely on GDP growth, which in turn is a function of

expenditure in core segments like power, railways, and infrastructure development, private sector

investments, and the speed at which projects are implemented. The power sector is the largest

contributor to the revenues of engineering companies. Engineering majors like Bharat Heavy

Electricals Limited (BHEL) and ABB Limited derive a significant chunk of their revenues (69 per cent

and 60 per cent, respectively) through the supply of equipment to the power sector.

Infrastructure is another key area of operation. Larsen & Toubro Limited, for example, garners

around 35 per cent of itssales from infrastructure activities like engineering, design and

construction of industrial projects, social and physical projects like housing, hospitals, information

technology (IT) parks, expressways, bridges, ports, and water/effluent treatment projects. The

industrial segment contributes to around 30 per cent of the total revenues of the engineering

sector. While India’s engineering industry has capabilities in manufacturing the range of machinery

required by the different user sectors, the rapid rise in demand has led to a large part of the

machinery requirements being met through imports. This indicates the size of opportunity for

investment in the engineering and capital goods sector in India. The engineering industry has

attracted FDI inflows of US$ 1,196.73 million from August 1991-July 2006.

Indian Engineering goods are gaining acceptance in overseas markets

India’s exports of engineering goods are valued at US$ 27 billion during 2006-07 which represents a

36 per cent growth over the exports for 2005-06 US$ 20 billion). The engineering sector accounted

for 14 per cent of the country’s total exports. It is also noteworthy that 40 per cent of India’s

engineering export is from the small and medium enterprises (SME) sector. A key driver for

increased engineering exports is the trend towards shifting of global manufacturing bases to

countries like India that offer lower costs and good engineering talent.

25


This trend is expected to continue and boost exports of engineering goods from India over the next

5 years. According to Engineering ExportsPromotion Council (EEPC), engineering exports could

touch US$ 30 billion by 2008-09. In such a scenario, India, driven by the engineering sector, will

emerge as a key global manufacturing hub.

The nature of Indian engineering exports is also changing with time. India is fast moving from

exporting lowvalue goods to developing countries to more sophisticated goods targeted at

developed countries. Capital goods account for 27 per cent of total engineering exports.

Growing Demand

Capacity creation and transformation in sectors such as infrastructure, power, mining, oil & gas,

refinery, steel, automotive, consumer durables are driving growth in the engineering industry. The

framework below captures some of the key factors that are contributing to domestic and

international demand for engineering goods from India. Restructuring of the state electricity

boards in different states, growth of private sector players and focus on capacity creation have

driven growth in the power sector.

Conclusion

The Engineering sector’s future outlook is promising. Drivers like power projects, other

infrastructure development activities, industrial growth and favorable policy regulations will drive

growth in manufacturing. The Indian engineering industry has been witnessing significant level of

capability enhancement over the years. As export markets open up, this will help India develop a

strong presence in global engineering exports. Power sector contributes the largest to the

engineering companies’ revenues. Major players in this sector like ABB and BHEL derive 60 per cent

and 69 per cent of their revenues from supplying equipments to the power sector. Going forward,

with the Government clearing the blueprint for adding 100,000 MW in the tenth (2002-07) and

eleventh 2007-12) five-year plans, the potential is high for the engineering majors. Emerging

trends such as outsourcing of engineering services can provide new opportunities for quantum

growth. Engineering and design services such as new product designing, product improvement,

maintenance and designing manufacturing systems are increasingly getting outsourced to countries

like India and China. India’s engineering sector has significant potential for future growth, in

manufacturing as well as services.

With development in associated sectors like automotive, one of the largest evolving markets for

engineering and industrial goods, and a well developed technical human resources pool, India is

poised to make significant strides in all segments of engineering.

26


___________________________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the purchase

or sale of any financial instrument or as an official confirmation of any transaction. The information

contained herein is from publicly available data or other sources believed to be reliable but we do not

represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors

Pvt. Ltd. or any of it’s affiliates shall not be in any way responsible for any loss or damage that may arise to

any person from any inadvertent error in the information contained in this report. This document is provide

for assistance only and is not intended to be and must not alone be taken as the basis for an investment

decision.

27


Firstcall India Equity Research: Email – [email protected]

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