bharat heavy electricals ltd - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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27 May 2015

Asia Pacific/India

Equity Research

Electrical Equipment (Capital Goods IN (Asia))

Bharat Heavy Electricals Ltd

(BHEL.BO / BHEL IN) UPGRADE RATING

Worst is behind us on strong cost control and

order inflow position ■ Better numbers, particularly EBITDA, compared to flash results. BHEL

reported weak absolute results with revenue/EBITDA/PAT decline of 16%/44%/52% YoY. However, these numbers were higher than the flash numbers and the composition of earnings was even stronger in terms of EBITDA contribution as employee cost was much lower than expected and other income was also lower. We had presumed higher other income and thus significantly lower operational EBITDA from the flash results in April. Full-year employee cost was Rs54.5 bn, about 10% lower than that in FY14. On the balance sheet side, receivables continued to remain high at Rs427 bn.

■ Order inflows in line but L1 position seems strong. FY15 order inflows at Rs308 bn, were up 10% YoY. However L1 position seemed strong with BHEL being L1 in ~5GW of projects and having a strong position in several other tenders of 5-6GW (e.g., Telangana/Tamilnadu). While private sector continues to shy away, NTPC and select state utilities have made strong progress on awarding new projects.

■ Negative operating leverage may be over. With an earnings contraction of more than 50% in the FY15 base, negative operating leverage may have peaked. We build in 13%/52% revenue and earnings CAGR over FY15-17E. We thus believe that the worst may be over and upgrade the stock to NEUTRAL with an increased TP of Rs270 (20x FY17E P/E) vs Rs200 (15x FY17E P/E) earlier.

■ Several concerns to cap upside post the likely overshoot. While the market may overshoot in the near term given lack of meaningful holdings, we believe an upside may be capped by (1) employee cost increases in FY17-19E, (2) stretched working capital/difficult receivables, (3) longer decision timelines in public tendering, and (4) prevailing low power demand, leading to back down (our inflow expectation is consistent with 12-15 GW of market p.a.

Share price performance

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Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the S&P

BSE SENSEX IDX which closed at 28805.1 on 12/02/15

On 12/02/15 the spot exchange rate was Rs62.43/US$1

Performance over 1M 3M 12M Absolute (%) 3.2 -12.1 -7.1 — Relative (%) 2.9 -7.0 -18.5 —

Financial and valuation metrics

Year 3/14A 3/15E 3/16E 3/17E Revenue (Rs mn) 383,888.2 295,389.5 321,983.0 374,706.9 EBITDA (Rs mn) 37,938.1 18,439.9 28,434.5 39,666.2 EBIT (Rs mn) 28,108.9 7,666.5 16,927.8 27,284.5 Net profit (Rs mn) 34,607.8 14,191.8 24,337.5 32,860.8 EPS (CS adj.) (Rs) 14.14 5.80 9.94 13.43 Change from previous EPS (%) n.a. 8.0 20.0 6.4 Consensus EPS (Rs) n.a. 7.0 10.5 13.3 EPS growth (%) -47.7 -59.0 71.5 35.0 P/E (x) 17.0 41.6 24.2 18.0 Dividend yield (%) 1.2 0.5 0.9 1.2 EV/EBITDA (x) 13.0 26.3 15.7 10.1 P/B (x) 1.8 1.7 1.6 1.5 ROE (%) 10.9 4.2 6.9 8.8 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, our estimates.

Rating (from Underperform) NEUTRAL* Price (26 May 15, Rs) 241.00 Target price (Rs) (from 200.00) 270.00¹ Upside/downside (%) 12.0 Mkt cap (Rs mn) 589,872 (US$9,240 mn) Enterprise value (Rs mn) 485,242 Number of shares (mn) 2,447.60 Free float (%) 36.9 52-week price range 297.0–197.8 ADTO - 6M (US$ mn) 16.9

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Lokesh Garg

91 22 6777 3743

[email protected]

Vaibhav Jain

91 22 6777 3968

[email protected]

27 May 2015

Bharat Heavy Electricals Ltd (BHEL.BO / BHEL IN) 2

Focus tables and charts Figure 1: FY16 order pipeline encouraging; L1 + tenders where BHEL is well placed

Project Capacity (MW) Client

L1 projects

Bhusawal 660 MAHAGENCO

Pakal Dul 1,000 J&K govt-NHPC-PTC JV

Tuticorin 525 SEPC

Barethi 2,640 NTPC

Rourkela 250 NTPC-SAIL JV

Sub-total 5,075

Prospects in FY16

Udangudi 1,320 TANGEDCO

Telangana projects (Nalagonda) 4,000 Telangana Genco

Krishnapatnam 800 APGENCO

Vijaywada 800 APGENCO

Pudimadaka 4,000 NTPC

Singareni Adilabad 600 Singareni Collieriers

Barh – I* 1,000 NTPC

Sub-total 12,520

Total 17,595

* For Barh-I, we have assumed partial capacity. Source: Company data, Credit Suisse research.

Figure 2: Order inflow supported by L1 at FY15-end Figure 3: Negative operating leverage is behind us now

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Power Industry(Rs bn)

13.6 14.9

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19.0 19.3 18.0

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6.2

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Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Large projects secured in FY2015 by BHEL in power segment

Order, Client Fuel Capacity (MW) Value (Rs mn) Nature of work

NTPC, Rammam Hydro 120 2,250 Turbine generator set

TS Genco, Manuguru project Coal 1,080 50,000 EPC order

KPCL, Yelahanka Gas 370 12,020 Turbine generator set

TS Genco, Kothagudem Coal 800 38,100 EPC order

NTPC, Darlipali Coal 1,600 2,200 Electrostatic Precipitator order

THDC, Vishnugad Pipalkoti Hydro 444 4,220 Turbine generator set

TANGEDCO, Ennore SEZ Coal 1,320 78,000 EPC order

GSECL, Wanakbori Coal 800 35,360 EPC order

Total 222,150

Source: Company data, Credit Suisse research

27 May 2015


Actual results better than prov. nos. Revenue/PAT higher than flash results; material costs lower than provisional nos.

BHEL reported weak absolute results with revenue/EBITDA/PAT decline of 16%/44%/52%

YoY. However, these numbers were higher than the flash numbers and the composition of

earnings was even stronger in terms of EBITDA contribution as employee cost was much

lower than expected and other income was also lower. We had presumed higher other

income and thus significantly lower operational EBITDA from the flash results in April. Full-

year employee cost was Rs54.5 bn, about 10% lower than that in FY14. On the balance

sheet side, receivables continued to remain high at Rs427 bn. Management indicated that

the annual reduction in employee cost was largely on account of a fall in number of

employees from ~47,500 at end-FY14 to ~44,900 at end-FY15. With these results, BHEL

has managed to report a 6% EBITDA margin for FY15 despite reporting a 2.8% margin for

9MFY15. On the balance sheet side, receivables continued to remain high at Rs427 bn.

Figure 5: 4QFY15 results—Actual results better than flash results – operating margin showing signs of improvement

(Rs mn) 4QFY15 4Q15-flash 4QFY14 3QFY15 % chg v/s

flash

%YoY %QoQ FY2015 % YoY 2016E 2017E

Net Sales 123,684 121,692 147,549 60,784 1.6 (16.2) 103.5 295,420 (23.0) 321,983 374,707

Raw materials (75,606) (74,232) (86,728) (33,292) 1.9 (12.8) 127.1 (169,202) (24.9) (186,750) (217,330)

Staff cost (9,152) (15,500) (13,204) (13,622) (41.0) (30.7) (32.8) (54,500) (8.2) (56,680) (62,348)

Other expenses (25,285) (22,188) (23,109) (12,128) 14.0 9.4 108.5 (53,277) (13.3) (50,118) (55,363)

EBITDA 13,642 9,772 24,508 1,742 39.6 (44.3) 683.1 18,441 (51.4) 28,148 39,365

Other income 3,235 4,500 5,655 3,937 (28.1) (42.8) (17.8) 14,649 (37.3) 18,722 20,808

Interest (265) (52) (479) (52) 407.3 (44.6) 407.3 (917) (30.9) (121) (121)

Depreciation (2,821) (2,769) (2,718) (2,564) 1.9 3.8 10.0 (10,773) 9.6 (11,507) (12,382)

PBT 13,790 11,450 26,965 3,062 20.4 (48.9) 350.3 21,400 (57.3) 35,242 47,671

Tax (4,907) (3,620) (8,519) (936) 35.6 (42.4) 424.0 (7,207) (53.6) (11,101) (15,016)

PAT 8,883 7,831 18,446 2,126 13.4 (51.8) 317.9 14,193 (59.0) 24,141 32,655

Key ratios (%)

Raw matl./sales 61.1 61.0 58.8 54.8 57.3 58.0 58.0

Staff cost/sales 7.4 12.7 8.9 22.4 18.4 17.6 16.6

Other exp./sales 20.4 18.2 15.7 20.0 18.0 15.6 14.8

EBITDA margin 11.0 8.0 16.6 2.9 6.2 8.7 10.5

PBT margin 11.1 9.4 18.3 5.0 7.2 10.9 12.7

Effective tax rate 35.6 31.6 31.6 30.6 33.7 31.5 31.5

PAT margin 7.2 6.4 12.5 3.5 4.8 7.5 8.7

EPS (Rs) 3.6 3.2 7.5 0.9 5.8 9.9 13.3

Orders (Rs bn)

Order backlog 1,010 1,012 1,016 1,040 (0.1) (0.5) (2.9) 1,010 (0.5) 1,144 1,220

Order inflow 101 101 163 66 0.2 (38.1) 52 308 10.0 459 465

Source: Company data, Credit Suisse estimates

27 May 2015


Figure 6: 4QFY15—segmental performance

Rs mn 4QFY15 4QFY14 3QFY15 % YoY % QoQ FY2015 FY2014 % YoY

Revenues

Power 102,401 122,108 48,624 (16.1) 110.6 239,835 324,854 (26.2)

Industry 27,550 32,208 14,931 (14.5) 84.5 69,635 78,525 (11.3)

EBIT

Power 13,119 23,354 4,587 (43.8) 186.0 29,617 54,010 (45.2)

Industry 2,664 6,268 64 (57.5) 4,035.9 3,417 9,855 (65.3)

Revenue mix (%)

Power 78.8 79.1 76.5 77.5 80.5

Industry 21.2 20.9 23.5 22.5 19.5

EBIT margin (%)

Power 12.8 19.1 9.4 12.3 16.6

Industry 9.7 19.5 0.4 4.9 12.6


Figure 7: Working capital has not improved in absolute despite a 23% YoY decline in revenues

(Rs mn) 2011 2012 2013 2014 1HFY15 2015

Shareholders’ funds 201,538 253,732 304,441 330,471 333,295 340,846

Loan funds 1,634 1,234 14,152 26,548 839 610

Total sources of funds 203,172 254,966 318,593 357,018 334,134 341,456

Net fixed assets 51,631 56,444 56,301 53,351 49,115 46,583

Investments 4,392 4,617 4,292 4,202 6,202 4,177

Cash & bank balance 96,302 66,720 77,321 118,729 85,039 98,127

Current assets 418,646 524,517 547,865 531,941 518,529 513,577

- Inventories 109,630 134,445 117,638 97,976 108,276 101,017

- Debtors 273,546 358,448 398,882 399,530 366,297 376,373

- Loans & advances 32,373 30,118 29,345 31,910 40,785 34,437

- Other current assets 3,096 1,506 2,000 2,525 3,171 1,750

Current liabilities & provisions 389,434 412,794 382,692 370,894 345,565 343,215

- Current liabilities 313,466 336,380 293,270 267,633 242,016 232,811

- Provisions 75,968 76,414 89,421 103,260 103,549 110,404

Net current assets (ex cash) 29,212 111,723 165,173 161,047 172,964 170,362

Deferred tax assets (net) 21,636 15,462 15,507 19,690 20,815 22,207

Total application of funds 203,172 254,966 318,593 357,018 334,134 341,456

Net current assets (days of sales) 26 86 127 153 184 210


Worst seems over; negative operating leverage

behind us

We believe that the worst for BHEL is over now. FY15 order inflows at Rs308 bn, were up

10% YoY. However, L1 position seemed strong with BHEL being L1 in about 4 GW of

projects and having a strong position in several other tenders of 5-6 GW (e.g.,

Telangana/Tamilnadu). While private sector continues to shy away, NTPC and select state

utilities have made strong progress on awarding new projects. Further, there are 5-6 GW

of orders from Telangana/Tamil Nadu which are likely to be placed in FY16, which can

lead to order awards for the company.

27 May 2015


Commodity and retiring employees helped contain cost

On the operating performance side, commodity prices have acted as a tailwind for the

company, especially for projects which were won couple of years back. Further, employee

cost reduction in FY15 was encouraging. In FY16, based on management guidance, there

will be net attrition of 1,800 employees (2,220 retirals and 300-400 new additions), which

should further keep employee expenses under control.

FY16 revenue to be driven by state and central government projects; execution has

not picked up on stranded projects

Management expects execution to pick up on state and central government projects,

which were awarded in FY15. They also cited cases like Jaiprakash Power Ventures’ Bara

project (Rs56 bn order for 3x660MW project) and Bajaj Hindustan’s Lalitpur power project

(Rs54 bn order for 3x660MW project), which were moving at a slow pace earlier, are now

seeing faster execution.

On the other hand, execution has not picked up on stranded projects belying their

expectation of some pick up post the coal block auctions. The list of projects, which are

stranded, includes projects of RattanIndia Power, Abhijeet (Chandwa project), Maheshwar

project, DB Power, Monet Power, Surana Power. Total quantum of slow moving order

backlog is Rs250 bn, which is 25% of total order backlog.

Order inflows likely to pick up; L1 list also healthy

4Q order inflows at Rs101 bn were down 38% YoY. However, on a full-year basis, order

inflows have grown at 10% YoY, and more than covered FY15 revenues of the company.

Management cited a potential market of ~20GW for the year including MoUs signed with

Telangana government (which will come through to BHEL as and when the Telangana

government awards those projects).

Figure 8: FY16 order pipeline encouraging; L1 + tenders where BHEL is well placed

Project Capacity (MW) Client

L1 projects

Bhusawal 660 MAHAGENCO

Pakal Dul 1,000 J&K govt-NHPC-PTC JV

Tuticorin 525 SEPC

Barethi 2,640 NTPC

Rourkela 250 NTPC-SAIL JV

Sub-total 5,075

Prospects in FY16

Udangudi 1,320 TANGEDCO

Telangana projects (Nalagonda) 4,000 Telangana Genco

Krishnapatnam 800 APGENCO

Vijaywada 800 APGENCO

Pudimadaka 4,000 NTPC

Singareni Adilabad 600 Singareni Collieriers

Barh – I* 1,000 NTPC

Sub-total 12,520

Total 17,595

* For Barh-I, we have assumed partial capacity. Source: Company data, Credit Suisse research.

27 May 2015


Figure 9: Order inflows supported by L1 and tenders where BHEL is likely to be favoured

31 45 39 70 58 56 65 55

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Power Industry(Rs bn)


Figure 10: Order backlog stabilised now; likely to pick up in the coming years

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Order backlog (Rs bn)


27 May 2015


Figure 11: Thermal capacity addition has been strong over the past three years

2.21.4

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Thermal power capacity addition (GW)


Figure 12: PLF levels have gone down from 78% in FY10 to 65% in FY15

72.774.2 74

76.878.62

77.27 77.68

74.9773.47

70.13

65.55 65.1

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FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

Coal based thermal PLF (%)

Note: This includes lignite-based capacities.


27 May 2015


Figure 13: 15GW p.a. of new additions likely at 7.5% GDP growth—we are building in ~8GW for BHEL

2011 2012 2013 2014 2015 2016E 2017E 2018E 2025E

Power requirement

Assumed GDP grth. (%) 8.5 6.5 5.1 5.1 6.5 7.0 7.5 7.5 7.5

Elasticity to GDP grth. (x) 0.44 1.35 1.27 0.08 1.00 1.00 1.00 1.00 1.00

Total demand (BU) 862 937 998 1,002 1,067 1,142 1,227 1,319 2,189

Demand growth 3.8 8.8 6.5 0.4 6.5 7.0 7.5 7.5 7.5

Power availability

Capacity (GW)

Hydro 38 39 39 41 41 43 44 45 52

Coal 94 112 130 145 165 180 195 210 315

Gas 18 18 20 22 23 23 23 23 23

Capacity (GW) 174 200 223 243 268 287 307 326 535

Generation (BU)

Hydro 114 131 114 135 129 147 152 157 181

Coal 567 613 692 746 836 935 1,016 1,151 2,018

Gas 100 93 67 45 41 57 71 71 81

Total availability (BU) 817 877 912 967 1,048 1,182 1,283 1,490 2,583

Growth (%) 6.2 7.4 4.0 6.0 8.4 12.7 8.5 16.2 8.6

Power deficit (%) 5.2 6.4 8.6 3.5 1.8 (3.5) (4.5) (12.9) (18.0)

Capacity addition (MW) 11.1 20.2 20.4 16.1 20.1 16.5 16.5 16.0 16.0

- Of which coal 9.7 18.1 18.2 15.1 19.4 15.0 15.0 15.0 15.0

Utilization/PLF (%)

Coal capacity PLF (%) 73 68 65 62 62 62 62 65 75

Source: Company data, Credit Suisse estimates. We have calculated coal capacity PLF based on average capacity during the year. This is

different from CEA’s data by 2-3 pp.

Figure 14: We are building in 7.5-8GW of power orders over FY16E/FY17E

14.6

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27 May 2015


BHEL is exploring new business opportunities

In terms of new business opportunities, there are a few areas which are being worked on:

1) Solar PV manufacturing – BHEL is looking to invest Rs27 bn in a 480MW solar PV

manufacturing facility. The government is likely to fund 40% of the capital cost while

the remaining amount will be invested by BHEL. Management did acknowledge the

competitive pressure (from Chinese products) in this segment, and believes that a

capital subsidy of 40% should help them become competitive in this segment. During

the 4QFY15 conference call, management noted that they are waiting for the Cabinet

approval for the 40% subsidy amounting to Rs10 bn. Management expects this

approval to come through within a quarter.

2) Submarine orders – BHEL has tied up with Hindustan Shipyard Ltd (HSL) to develop

submarines. This is driven from Indian government's intent to encourage domestic

manufacturing of submarines. Management mentioned that these are early days for

them to assess the business potential from this new area (in terms of potential

revenues that they can get as against their JV partner HSL). During the 4QFY15

conference call, management emphasised that majority of value addition will be done

by BHEL in this project. However, it is still some time away.

3) Defense orders – The Indian Navy is looking to award contracts for manufacturing of

naval guns for three to four ships. This is currently at initial stages, and bids are likely

to be finalised next year.

4) Export markets – Here, management cited licensing issues, which prevent them from

supplying equipment to developed markets. In case of developing markets such as

Africa, which are high growth potential areas, financing issues have constrained them

from benefitting from the business opportunity. Further, bid guidelines in certain cases

also make them ineligible to bid for projects in certain countries. However, there are a

few cases such as Bangladesh, where NTPC is setting up a power plant, and is

ensuring that BHEL is allowed to bid for the contract.

Worst seems behind; upgrade to NEUTRAL

We believe that the worst is over for the stock with order inflows likely to pick up in FY16. In

addition, as revenues pick up, operating leverage will also stop working against the

company. The company has seen a decline in employee expenses during the year.

Management commentary seemed to suggest that FY16 employee expenses could also

remain at similar level.

We have revised our numbers to account for the improvement in operating performance.

Also, we build in higher order inflows for the company as compared to last year.

27 May 2015


We build in 8GW of utility segment and ~Rs100 bn of industrial orders p.a. in FY17E

Figure 15: We expect BHEL to post revenue/PAT CAGR of 13%/52% over FY15-17E Segment-wise inflow and execution for BHEL, March fiscal year-ends, 2009-2017E (Rs bn)

(Rs bn) Year ending Mar 2010 2011 2012 2013 2014 2015 2016E 2017E

Power segment

Utility order inflow (GW) 16.5 15.1 3.9 7.9 4.9 4.5 8.0 7.5

Realization (Rs mn/MW) 24.3 29.4 29.9 28.7 35.0 45.0 40.0 40.0

Utility order inflow 401 443 118 226 170 203 320 300

Spare orders 19 21 23 29 34 38 42 46

International orders 36 37 2 20 26 7 20 22

Order inflows 456 502 142 274 230 247 382 368

% growth (9.7) 10.3 (71.6) 92.6 (16.2) 7.6 54.2 (3.6)

Revenues (gross) 269 332 379 396 325 240 265 309

% growth 25.8 23.5 14.2 4.5 (17.9) (26.2) 10.5 16.7

Order backlog 1,271 1,456 1,175 1,053 930 937 1,054 1,112

Bill to book ratio (%) 21 22 25 30 28 23 24 25

Industry segment

Order inflows 135 104 79 41 50 62 78 97

% growth 31.5 (23.1) (24.3) (47.9) 22.5 0.0 25.0 25.0

Revenues (gross) 79 102 117 106 79 70 72 83

Order backlog 200 206 176 116 86 82 90 108


Company total

Order inflows 590 606 221 315 280 309 459 465

Net revenues 329 416 472 476 384 295 322 375

Order backlog 1,471 1,661 1,350 1,169 1,015 1,019 1,144 1,220


EBITDA 54 79 91 86 38 18 28 39

EBITDA margin (%) 16.5 19.0 19.3 18.0 9.9 6.2 8.7 10.5

PAT 43 60 70 66 35 16 24 33

EPS (Rs) 17.6 24.6 28.8 27.0 14.1 6.6 9.9 13.3


27 May 2015


Companies Mentioned (Price as of 26-May-2015)

Bharat Heavy Electricals Ltd (BHEL.BO, Rs241.0, NEUTRAL, TP Rs270.0) Jaiprakash Power Ventures Ltd (JAPR.BO, Rs7.32) Larsen & Toubro (LART.BO, Rs1618.3) NHPC (NHPC.BO, Rs19.2) Patel Eng (PENG.BO, Rs81.5) Thermax (THMX.BO, Rs1023.4)

Disclosure Appendix

Important Global Disclosures

I, Lokesh Garg, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Bharat Heavy Electricals Ltd (BHEL.BO)

BHEL.BO Closing Price Target Price

Date (Rs) (Rs) Rating

23-Aug-12 233.35 180.00 U

08-Apr-13 182.35 164.00

27-Aug-13 112.05 99.00

19-May-14 268.25 117.00

24-Jul-14 236.35 NR

20-Nov-14 245.40 200.00 U *

* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM

N O T RA T ED

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment oppor tunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calcula tion includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

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Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (53% banking clients)

Neutral/Hold* 39% (50% banking clients)

Underperform/Sell* 16% (44% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

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Price Target: (12 months) for Bharat Heavy Electricals Ltd (BHEL.BO)

Method: Our price target of Rs270 for BHEL is based on 20x FY17E EPS (earnings per share), which is justified given expectation of pick up in earnings over FY15-17E as negative operating leverage is behind us now.

Risk: Potential upside risks to our Rs270 target price for BHEL include quicker than expected power & coal sector reforms, sharp pick up in power demand in the country, relaxation of lending terms and increase in dividend payout ratio. Downside risks include delays in ordering of new projects and macro slowdown risks.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

Please visit https://credit-suisse.com/in/researchdisclosure for additional disclosures mandated vide Securities And Exchange Board of India (Research Analysts) Regulations, 2014

Credit Suisse may have interest in (THMX.BO, LART.BO, JAPR.BO, NHPC.BO, PENG.BO, BHEL.BO)

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (BHEL.BO) within the past 12 months

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Credit Suisse Securities (India) Private Limited ........................................................................................................... Lokesh Garg ; Vaibhav Jain

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27 May 2015


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