Sushil BHEL 03Feb10

download Sushil BHEL 03Feb10

of 15

Transcript of Sushil BHEL 03Feb10

  • 7/28/2019 Sushil BHEL 03Feb10

    1/15

    BHEL is the largest engineering enterprise in India manufacturing 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. In order to meet the increasing demand of power equipments it is currentlyexpanding its capacities to 20,000 MW, which expected to commission by Dec 2011. The

    Company has order backlog of Rs 1.34 trn with visibility for next three and half years and

    we expect its margins to expand by 521 bps by FY12.

    Robust order book with visibility for next three and half years

    BHEL has an order backlog of Rs. 1.34 trn. It has already won orders worth Rs. 369.5 bn

    during 9MFY10 and is well placed to win orders worth 180 bn in order to achieve its order

    intake target of Rs. 550 bn. Its current order book is 4.4x its trailing 12 months revenues

    giving it a visibility of next three and half years.

    Capacity expansion to provide economies of scale

    BHEL has recently expanded its capacity from 10,000 MW to 15,000 MW which is expected

    to stabalize by March 2010. It is further expanding its capacities for power equipmentmanufacturing. It is in the process of adding additional 5,000 MW taking its total capacity to

    20,000 MW. We expect that BHEL will be able to achieve economies of scale by spreading of

    fixed costs over higher volumes and through savings on outsourcing costs .

    Supercritical projects to provide the next growth trigger

    Share of total Super Critical Sets is expected to be 43,640 MW (59% of Coal based sets) in

    12th Plan and 64,000 MW (100% of Coal based sets) in 13th Plan. CEAs policy paper has put

    forward guidelines which would encourage indigenous manufacturing in India and benefit

    companies like BHEL. BHEL has signed JVs with state utilities to set up super critical power

    projects. These JVs will in turn pass on the equipment order to BHEL.

    BHEL proving its prowess in spite of competition from Chinese equipment

    A CEA panel has recently observed that the Chinese equipment was on par with the Indianequipment - quality wise. However, a recent cancelation of order placed with a Chinese

    manufacturer by Indiabulls and subsequent placement of the same order with BHEL has once

    again raised concerns on the quality of the Chinese equipment. BHEL has also claimed that its

    equipment performance has been consistently 2% higher than other available equipments &

    operating availability is also higher. Even though the initial capital cost of Chinese sets is

    lower, operating cost is higher than Indian sets resulting in over-all higher cost.

    OUTLOOK & VALUATIONBHEL is the largest manufacturer of power equipment in the country. The company has been

    expanding its capacities on back of the increased capacities coming up during the 11th

    and

    12th

    Plan. Several super-critical orders are awaited to be released which is expected to

    provide further impetus to BHELs already robust order book. BHEL has also increased itsorder book from industry segment which could enable it to continue the pace of its growth in

    the future. We expect the sales of the company to grow at a CAGR of 24% in next three years.

    BHEL will be able to improve its margins by 521 bps by FY12. At CMP of Rs.2406 the stock is

    trading 23x FY11E EPS of Rs.105 & 18x FY12E EPS of Rs.137. Given its strong order book,

    strong balance sheet and proven track record of the management, BHEL is well poised to

    capture the upcoming opportunities in the Power sector in the country and thus we initiate

    coverage with an Accumulate rating on the Company with a target price of Rs.2767 (based on

    20x its FY12E EPS of Rs.137).

    Initiating Coverage

    Bharat Heavy Electricals Ltd.

    February 01 , 2010 ACCUMULATE MEDIUM RISK PRICE Rs.2406 TARGET Rs.2767

    POWER

    SHARE HOLDING (%)

    Promoters 67.7

    FII 15.6

    FI / MF 10.8

    Body Corporates 4.2

    Public & Others 1.7

    STOCK DATA

    Reuters Code

    Bloomberg Code

    BHEL.BO

    BHEL.IN

    BSE Code

    NSE Symbol

    500103BHEL

    Market

    Capitalization*

    Rs. 1177.8 bn

    US$ 25.4 bn

    Shares

    Outstanding*489.5 mn

    52 Weeks (H/L) Rs.2,550 /1,251

    Avg. Daily

    Volume (6m)123,423 Shares

    Price Performance (%)

    1 M 2M 3M

    1 2 7

    200 Days EMA: Rs. 2154

    *On fully diluted equity shares

    Part of Classic

    Please refer to important disclosures at the end of the report For private Circulation Only.Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435.Office : 12, Hom i Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

    KEY FINANCIALSY/E

    Mar

    Revenue

    (Rs mn)

    APAT

    (Rs mn)

    AEPS

    (Rs)

    AEPS

    (% Ch.)

    P/E

    (x)

    ROCE

    (%)

    ROE

    (%)

    P/BV

    (x)

    FY09 262123 31120 63.6 8.9 37.8 30.1 26.2 9.1

    FY10E 322382 41106 84.0 32.1 28.7 33.1 28.4 7.4

    FY11E 402977 51420 105.0 25.1 22.9 33.7 28.5 5.9

    FY12E 503721 66882 136.6 30.1 17.6 35.0 29.3 4.6

    ANALYSTViral Shah | +91 22 4093 5045

    [email protected]

    SALES:

    Devang Shah | +91 22 4093 6060/61

    [email protected]

    Nishit Shah | +91 22 4093 6074

    [email protected]

    mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
  • 7/28/2019 Sushil BHEL 03Feb10

    2/15

    February 01 , 2010 2

    Bharat Heavy Electricals Ltd.

    Robust order book with visibility for next three and half years

    BHEL has a robust order book which has grown at a CAGR of about 38% from Rs.236 bn

    in FY04 to Rs. 1170 bn in FY09. Its order book consists of mainly 3 segments viz. Power,

    Industry and Overseas. All the three segments have contributed to its overall growth in

    past, with highest growth derived from Power segment. Power segment has grown at a

    CAGR of 30% followed by Industry segment which has grown at a CAGR of 23.5% in past

    five years.

    Source: Company

    Despite the slowdown in the Indian economy during 2007-08 to 2008-09 BHEL was able

    to achieve a growth in the order intake of 18.7% during the same period, which clearlyhighlighted the intention of the Government on increasing the power capacity and

    generation in the country. As of H1FY10, BHEL had an order book intake of Rs. 208.2 bn

    which comprised 63% of orders contributed by Power, 33% of orders coming from

    Industry and 5% from Overseas. Post H1FY10, BHEL has won additional order worth ~

    Rs.160 bn and as of9MFY10 BHELs order intake stands at Rs.369.5 bn Of these 94% of

    the orders are from the Private sector (independent power producers) as against just

    22% as on FY09. As of date the order backlog stands at Rs.1.34 trn.

    Source: Company

    0

    1

    2

    3

    4

    5

    0

    500000

    1000000

    1500000

    2000000

    FY04 FY05 FY06 FY07 FY08 FY09 FY10EFY11EFY12E

    Book-

    to-bill

    Rs.

    mn

    Order book

    Orders booked Orderbacklog Orderbacklog/sales

    77%

    20%

    3%

    Order book intake break up 9M FY10

    Power Industry Overseas

  • 7/28/2019 Sushil BHEL 03Feb10

    3/15

    February 01 , 2010 3

    Bharat Heavy Electricals Ltd.

    We believe that this is a positive move by BHEL, as most of the orders during the 12th

    five year plan would be coming from private players. BHEL has guided for an order book

    intake of Rs. 550 bn by end of FY10. We believe that since it has achieved an order

    intake of Rs.350 bn for 9MFY10 it can achieve the balance Rs. 180 bn worth of orders

    on back of the supercritical power projects which are awaited to be released soon.BHEL has an order book to bill ratio of 4.4x on a trailing twelve month basis. Going

    forward BHELs order book accretion would happen mainly from supercritical orders,

    11 bulk orders expected from NTPC and Power generation JVs signed by BHEL with

    state utilities (which would place equipment orders with BHEL). We believe that orders

    worth Rs. 621.3 bn will be booked in FY11E and orders worth Rs.640.7 bn will be

    booked in FY12E.

    Description MW Sector Order Value

    Rs.mn

    Power Engineers Contracting Company 42 Power 910

    IOC 20 Power 1050Chennai Petroleum 20 Power 1700

    Oil India 20 Power 1900

    Petroleum Development Oman 126 Power 2050

    Petroleum Development Oman 252 Power 3750

    Adhunik Power & Natural Resources 270 Power 6400

    Adhunik Power & Natural Resources 270 Power 6400

    Ideal Energy Projects 270 Power 7030

    Indian Railways 0 Industrial 9900

    NTPC-Tamil Nadu Electricity Co. 500 Power 13000

    Korba West Power Co. 600 Power 14750

    Jindal India Thermal Co. Ltd. 1200 Power 26000Monnet Power Co. Ltd 1050 Power 26300

    Jindal Power Ltd 2400 Power 50400

    Prrayagraj Power Gen. Co. 1980 Power 56000

    Karnataka Power Corporation 3 Power 420

    Power Grid NA Power 2000

    Hindalco Industries 900 Power NA

    Source: Sushil Finance Research

  • 7/28/2019 Sushil BHEL 03Feb10

    4/15

    February 01 , 2010 4

    Bharat Heavy Electricals Ltd.

    Capacity expansion to provide economies of scaleIndia has been witnessing a huge surge in power equipment demand on back of the

    capacity additions in the power sector. In order to cater to this demand a huge onus lies

    on BHEL. BHEL has been catering to 65% of the all India capacity additions. BHEL

    currently has a manufacturing capacity of 15,000 MW, which has been expanded over a

    period of time from 6000 MW in FY05. The capacity of 15,000 MW will stabilize by

    March 2010. Hence the complete benefits of the expanded capacity will start accruing

    from FY11 onwards. The capacity expansion has taken place at a cost of ~Rs.11 bn. The

    Company further plans to expand its capacity to 20,000 MW by 2012 at a capital

    expenditure of ~ Rs. 16 bn. It is planned to come into operations from Dec 2011. BHEL is

    currently operating at a full capacity and in addition outsources significant amount of

    BTG (boiler-turbine-generator) work. BHEL is at an advantage compared to its

    competitors as most of its capacity addition is a brown field expansion whereas its

    competitors are doing greenfield expansions. With the increase in the capacities, BHEL

    will be able to save on outsourcing costs, as well as achieve economies of scale thereby

    enhancing its operating margins. In addition to the above BHEL has planned a capacityaugmentation of transformers from 20,500 to 45,000 MVA and Capacity enhancement

    of Electrical Motors from 1340 nos. to 2250 nos.

    BHEL - Major operating units

    Bhopal Heavy Electrical Plant

    Jhansi Transformer plant

    HaridwarHeavy Electrical Equipment, Pollution Control

    Research, Central Foundry Forge Plant

    Hyderabad Heavy Power Equipment Plant

    TirchyHigh Pressure Boiler Plant, Seamless Steel

    Tube Plant, Welding Research Institute

    Ranipat Boiler Auxiliaries Plant

    Bangalore Electronics and Industrial Systems Division

    Source: Company

    Salient Features of capacity augmentation

    In view of uncertainty of Gas and Nuclear Capacities, provision for inter-

    changeability of facilities have been made.

    Inter-Unit and Intra-Unit Load sharing has been provided.

    Respective facilities have inbuilt Capacity for Spares based on their consumption.

    Installed Capacity has 10-15% stretch margin, as demonstrated in past.

    Super-Critical projects to provide the next growth triggerShare of total Super Critical Sets is expected to be 43,640 MW (59% of Coal based sets)

    in 12th Plan and 64,000 MW (100% of Coal based sets) in 13th Plan.

    Plan Total

    Subcritical

    MW

    600

    MW

    (Nos.)

    800

    MW

    (Nos.)

    Total

    Supercritical

    MW

    Total

    10th

    9620 0 0 0 9620

    11th

    44490 9 2 7540 52030

    12th 30473 54 10 43640 74113

    13th 0 54 23 64100 64100

    Source: Company, International Conclave

    In order to promote indigenous manufacturing in India for supercritical power

    equipments, the CEAs policy paper has stipulated certain guidelines which include

  • 7/28/2019 Sushil BHEL 03Feb10

    5/15

    February 01 , 2010 5

    Bharat Heavy Electricals Ltd.

    technical restrictions such as maximum design turbine cycle heat rate of 1850 kcal/kwhr

    (incase unit is provided with steam driven boiler feed pumps) & 1810 kcal/kwhr (in case

    of electrically driven boiler feed pumps). All Central and State PSUs have been directed

    to invite bids of BTG for supercritical projects mandatorily from companies setting up

    indigenous manufacturing facilities in India, as per proposal for bulk ordering of 11 units.Further all the supercritical units to be set up by public/private will be eligible for

    customs duty and deemed exports benefits. The Government is also working on ushering

    in 10 ultra supercritical power projects of 800 MW capacity each. These could be ready

    for tendering next month, after the current proposal for putting up 11 supercritical

    projects of NTPC and Damodar Valley Corporation is floated.

    Till date, BHEL has alredy won folowing orders for super-critical projects from below

    listed companies

    Source: CEA

    In order to get benefit of the supercritical projects and to minimize the impact of

    competition BHEL has signed up JVs with state utilities where BHEL holds a 26% stake.

    These JVs would place BTG orders for Power equipment with BHEL.

    Source: Company

    BHEL proving its prowess, in spite of competition from Chinese equipmentIn the 11th plan period, out of the likely thermal power capacity addition of 61,237 MW,

    equipment for about 21,000 MW is being imported from China. Similarly, out of total

    orders of about 15,000 MW for hydro power projects, orders for 464 MW have been

    placed on Chinese manufacturers. In the 12th plan period, out of total orders of about

    45,000 MW placed so far, orders for thermal capacity of about 14,000 MW have been

    placed on Chinese manufacturers or suppliers. Equipments for about 33 % of thermalprojects are being imported from China. Thus, the import of cheaper power equipment

    from China has been imposing a threat to domestic manufacturers including BHEL.

    A CEA panel has recently observed that the Chinese equipment was on par with the

    Indian equipment - quality wise and operated at 81% PLF in Sep-Nov 09.It also

    mentioned that the delivery schedule of Chinese equipments was better compared to

    that of BHEL. This panel had put all the quality issues being raised about Chinese

    equipment to rest. However, a recent cancelation of order placed with a Chinese

    manufacturer by Indiabulls and subsequent placement of the same order with BHEL has

    once again raised concerns on the quality of the Chinese equipment. BHEL has agreed to

    the fact that Chinese manufacturers are a threat. However, BHEL has also claimed that

    its equipment performance has been consistently 2% higher than other available

    Project Company Supplier Capacity (MW)

    Krishnapatnam AP Genco BHEL / L&T 1,980

    Barh Stage 2 NTPC BHEL 1,600

    TNEB TNEB - BHEL JV BHEL 1,320

    Bara Jaiprakash BHEL 1,980

    States Capacity (MW) Configuration

    Tamil Nadu 1,600 2 X 800MW

    Karnataka 1,980-2,400 3 X 660/800MWMaharashtra 1,320 2 X 660MW

    Madhya Pradesh 1,600 2 X 800MW

    Total 6,500-6,920

  • 7/28/2019 Sushil BHEL 03Feb10

    6/15

    February 01 , 2010 6

    Bharat Heavy Electricals Ltd.

    equipments and operating availability is also higher. Even though the initial capital cost

    of Chinese sets is lower, operating cost is higher than Indian sets resulting in over-all

    higher cost.

    BHEL is also in talks with Chinas largest manufacturer of high-voltage transformers,Tebian Electric Apparatus Stock Co. Ltd (TBEA), to jointly manufacture power equipment

    in India. Currently, BHEL manufactures power transformers up to capacity of 400kV while

    TBEA has the capacity to make ultra high voltage (UHV) power equipment of up to

    1,000kV capacity. A tie-up with TBEA will allow BHEL to compete with companies such as

    Siemens AG and ABB in the high-voltage segment, which is expected to receive a boost in

    view of the expansion of the National Grid.

    Sales to grow at 24% CAGR and Operating Margins to expand by 521 bpsBHELs current order book is currently 4.4x its trailing twelve month revenues. We

    believe that going forward its growth in order book intake will slowdown given the fact

    that a significant portion of orders in the 12th and the 13th plan will be for supercriticalprojects and several new players are expected to enter into this industry. This would

    eventually reduce BHELs market share. However, given its already robust order book

    and increasing share of industry segment in its order book, there is a clear visibility of

    revenues for next three and half years. BHELs revenue would be able to grow at a CAGR

    of 24% from FY09 to FY12E.

    Source: Sushil Finance Research Estimates, Company

    BHELs expansion would enable it to reduce its outsourcing costs and attain economies of

    scale by spreading its fixed costs over its higher volumes. Further, benefits of lower

    commodity costs have already started accruing and larger size of boiler orders from 12th

    plan would aid in reduce the raw material as a percentage of sales from 62.8% in FY09 to

    60.5% in FY12E. The wage revision had dented BHELs margins during FY09. A lot of

    uncertainty towards this wage revision has now been a settled. BHEL is planning to add

    18,000-20,000 employees up to FY12E. Although the cost per employee would rise,

    productivity per employee on expanded capacities would go higher. We expect BHELs

    operating margins to improve by 521 bps to 19.3% by FY12.

    0.0%

    5.0%

    10.0%

    15.0%

    20.0%

    25.0%

    30.0%

    35.0%

    40.0%

    0

    100,000

    200,000

    300,000

    400,000

    500,000

    600,000

    FY07 FY08 FY09 FY10E FY11E FY12E

    Growth(in%

    )

    R

    s.mn

    Sales analysis

    Sales Sales growth

  • 7/28/2019 Sushil BHEL 03Feb10

    7/15

    February 01 , 2010 7

    Bharat Heavy Electricals Ltd.

    Source: Sushil Finance Research Estimates, Company

    Opportunities in the Power generation and Power equipment industry

    India has been one of the fastest growing economies in emerging markets. Indian

    economy has posted more than 9% growth for three years consecutively and has seen a

    decade of more than 7% growth. One of the key factors behind any growing country is

    the energy requirement and supply in that country. The Indian power sector has

    historically been characterized by energy shortages which have been increasing over the

    years. In the period from April 2009 to Dec 2009, peak energy deficit has been 11%. Due

    to inadequate supply and distribution infrastructure, the per capita consumption of

    energy in India is extremely low in comparison to most other parts of the world.

    Source: CEA

    According to the 17th Electric Power Survey, Indias peak demand will reach

    approximately 153 GW with an energy requirement of approximately 969 billion units by

    fiscal year 2012. By the fiscal year 2017, peak demand is expected to reach 218 GW with

    an energy requirement of 1,392 billion units.

    0%

    5%

    10%

    15%

    20%

    25%

    0

    20000

    40000

    60000

    80000

    100000

    120000

    FY07 FY08 FY09 FY10E FY11E FY12E

    PBIDT

    rgn(%)

    Rs.mn

    EBITDA analysis

    EBITDA EBITDA Mrgn (%)

    0

    2

    4

    6

    8

    10

    12

    14

    16

    18

    0

    20000

    40000

    60000

    80000

    100000

    120000

    2001 2002 2003 2004 2005 2006 2007 2008 2009

    Percentage(%)

    MW

    Peak Demand

    Demand (MW) Availablity (MW) Deficit (%)

  • 7/28/2019 Sushil BHEL 03Feb10

    8/15

    February 01 , 2010 8

    Bharat Heavy Electricals Ltd.

    Source: CEA Conclave

    Projected capacity addition chart

    Source:CEA Conclave

    However the nation has witnessed severe slippages in the implementation of the five

    year plan. The target set for capacity addition during the 10th Plan was 41,110 MW

    against which the capacity addition achieved during 10th Plan was 21,180 MW. Some of

    the major reasons for slippages during the 10th Five year plan

    Delay and non sequential supplies/erection by suppliers/contractors

    Delay in tie-up of super critical technology by indigenous manufacturers

    Non-availability of Gas/Fuel

    Delay in award of works

    Projects not taken up/Escrow cover not given/Financial closure not

    achieved/Funds not tied up

    Delay in approval of investment decision of Hydro projects

    0

    50

    100

    150

    200

    250

    300

    350

    0

    500

    1000

    1500

    2000

    2500

    2006-07 10th

    plan end

    2011-12 11th

    plan end

    2016-17 12th

    plan end

    13th plan

    GW

    BU

    Demand Summary of All India Forecast

    Energy Requirement (BU) Peak Load (GW)

    0

    200

    400

    600800

    1000

    1200

    1400

    2012E 2017E 2022E 2027E 2032E

    GW

    Projected Power Demand

    Year Projected Power Demand (GW)

  • 7/28/2019 Sushil BHEL 03Feb10

    9/15

    February 01 , 2010 9

    Bharat Heavy Electricals Ltd.

    Delay in Environmental clearance, Geological surprises, Natural calamities, R&R

    issues, delay in signing of MoU with host state, Court Cases for Hydro Projects.

    Law & Order Problems.

    Present Status of the projects during 11th

    plan

    As of Dec 2009 Indias total installed capacity has reached 156,092 MW, which is an

    addition of 23,763.23 MW over the installed capacity during the 10th plan period. As per

    the planning commission, target capacity of 78,577 MW needs to be added during the

    11th plan.

    Projected Power demand

    Based on the projected demand, Integrated Energy Policy projections for Capacity

    addition requirement is:

    XI Plan - 102,000 MW (target - 78,577 MW)

    XII Plan - 104,000 MW (target ~100000 MW)

    XIII Plan - 151,000 MW (target ~100000 MW)XIV Plan - 197,000 MW

    Reasons for delay in 11th Plan

    Delay in placement of orders - mainly Civil Works & BOPs.

    Delay and non-sequential supply of material for Main Plant and BoPs.

    Shortage of skilled manpower for erection and commissioning.

    Contractual disputes.

    Inadequate deployment of construction machinery.

    Shortage of fuel (Gas & Nuclear).

    Delay in Land Acquisition.

    Delay in creation of infrastructure facilities

    12th plan capacity addition envisaged

    A capacity addition of about 100,000 MW from conventional power projects is required

    during the 12th Plan to meet the All-India demand projections of 17th EPS Report. CEA

    has identified shelf of Hydro projects totaling to about 30,000 MW for 12th Plan. Out of

    this, projects of about 5,000 MW have major problems related to environment and R&R.

    On detailed examination, commissioning of Hydro capacity of about 25,000 MW seems

    feasible and the remaining projects need to be pursued for early completion of DPRs and

    statutory clearances. A shelf of about 100,000 MW projects has also been prepared

    comprising of projects which have been given Coal linkage or have been allotted Coal

    block or are based on imported Coal. Gas based capacity has not been firmed up for the

    12th Plan so far due to uncertainty about availability of Gas for Power Sector.

  • 7/28/2019 Sushil BHEL 03Feb10

    10/15

    February 01 , 2010 10

    Bharat Heavy Electricals Ltd.

    Source: International Conclave, Base Paper

    Opportunity in Power equipment

    Power equipment broadly comprises of two categories viz. boiler-turbine-generator

    (BTG) (50%) and balance of plant (BOP) (35%). A BTG package contains 50% boilers and

    50% turbine-generators. A balance of plant typically consists of coal handling plant, ash

    handling, chimneys, cooling towers, DM plant, fuel oil system and pre-treatment plant.

    With every capacity addition plan, there is an increased requirement of power

    equipments. Assuming an addition of ~270 GW until 13th plan, BTG demand translates to

    ~135 GW. This means an annual demand of 11 GW per annum. Assuming a Rs. 50 mn

    capex for the power plant the BTG opportunity would be about Rs.6.8 trn. (50% of total

    spend).

    Estimated requirement for BOP during the 12th plan

    During the Eleventh and Twelfth plans, India targets to add ~170 GW which in turn would

    generate a BoP opportunity worth INR 2.9 trn (Rs.17 mn per MW to be spent across

    various BOP packages).

    BOP Requirement during 12th Plan

    Name of the System BOP's Requirement

    Cool Handling System 148

    Ash Handling System 148DM Plant 211

    Cooling Towers 218

    Chimneys 77

    Fuel Oil System 148

    Pre-Treatment Plant 160

    Source: Base Paper, International Conclave

    0

    200

    400

    600

    800

    1000

    2012-13 2013-14 2014-15 2015-16 2016-17

    Rs.bn

    12th Plan Funding requirement

    Hydro Thermal Nuclear

  • 7/28/2019 Sushil BHEL 03Feb10

    11/15

    February 01 , 2010 11

    Bharat Heavy Electricals Ltd.

    Risk & Concerns

    Delays in the expansion of capacity could affect the volume and earnings estimate

    for BHEL.

    Significant jump in commodity prices can affect our operating margin estimates.Several new players such as L&T, Bharat Forge, JSW Group, BGR Energy, and

    Thermax have been reportedly planning to form a JV with a foreign partner and

    have plans to enter manufacturing of supercritical power equipments. This will

    create a level playing field, thus, giving BHEL a tough competition in bidding for

    supercritical projects.

    With new players entering the BTG manufacturing, there could be a possible

    overcapacity threat that could be faced by the industry.

    A CEA panel has recently observed that the Chinese equipment was on par with the

    Indian equipment quality wise and operated at 81% PLF in Sep-Nov 09. This could

    ease concerns over quality of the Chinese equipment and increase competition for

    BHEL.

    OUTLOOK & VALUATIONBHEL is the largest manufacturer of power equipment in the country. The company

    has been expanding its capacities on back of the increased capacities coming up

    during the 11th

    and 12th

    Plan. Several super-critical orders are awaited to be

    released which is expected to provide further impetus to BHELs already robust

    order book. BHEL has also increased its order book from industry segment which

    could enable it to continue the pace of its growth in the future. We expect the sales

    of the company to grow at a CAGR of 24% in next three years. BHEL will be able to

    improve its margins by 521 bps by FY12. At CMP of Rs.2406 the stock is trading 23x

    FY11E EPS of Rs.105 & 18x FY12E EPS of Rs.137. Given its strong order book, strongbalance sheet and proven track record of the management, BHEL is well poised to

    capture the upcoming opportunities in the Power sector in the country and thus we

    initiate coverage with an Accumulate rating on the Company with a target price of

    Rs.2767 (based on 20x its FY12E EPS of Rs.137).

  • 7/28/2019 Sushil BHEL 03Feb10

    12/15

    February 01 , 2010 12

    Bharat Heavy Electricals Ltd.

    Annexure: Company Background

    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 inthe indigenous Heavy Electrical Equipment industry in India. 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, 4 power sector regional centers,

    8 service centers, 15 regional offices, one subsidiary co., Joint Ventures and a large

    number of Project Sites spread all over India and abroad enables the Company to

    promptly serve its customers and provide them with suitable products, systems and

    services - efficiently and at competitive prices.

    Power Generation

    BHEL manufactures a wide range of products and systems for thermal, nuclear, gas andhydro-based utility power plants. BHEL has proven turnkey capabilities for executing

    power projects from Concept to Commissioning. BHEL-built power generating sets

    account for nearly two third of the overall Installed capacity and around three fourth of

    the power generated in India. BHEL supplies steam turbines, generators, boilers and

    matching auxiliaries up to 800 MW ratings including supercritical sets of 660/800 MW.

    BHEL has facilities to go up to 1000 MW unit size. BHEL-make steam turbines are

    designed to achieve higher efficiencies. To make efficient use of high ash content coal

    available in India, BHEL also supplies circulating fluidized bed combustion (CFBC) boilers

    for thermal plants. BHEL manufactures 220/235/500/540 MWe Nuclear turbine-

    generator sets. BHEL is the only Indian company capable of manufacturing large-size gas

    based power plant equipment, comprising advanced-class combined-cycle operations. It

    has retained 100% share of R&M market of Thermal sets in the country. BHEL is one of

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

    Combined Cycle (IGCC) technology which would usher in clean technology.

    BHEL offers a large variety of control equipment and solutions, for power stations

    ranging from simple control systems to single push-button automation. Company has

    expertise of supplying complete Systems for entire power stations comprising Boiler,

    Turbine and Balance of Plant (BOP).

    Industries

    BHEL is a leading manufacturer of a variety of electrical electronic and mechanical

    equipment, to meet the demands of a number of industries, like metallurgical, mining,

    cement, paper, fertilizers, refineries & petro chemicals etc. other than power utilities.BHEL has supplied systems and individual products including a large number of co-

    generation 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 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. BHEL is the leading company in the world having mastered the art of burning

    Naptha in Gas Turbines Industry sector is fully geared to execute EPC contracts for

    captive power plants from concept to commissioning.

  • 7/28/2019 Sushil BHEL 03Feb10

    13/15

    February 01 , 2010 13

    Bharat Heavy Electricals Ltd.

    Railways

    BHEL provides traction propulsion system and controls to Indian railways. The range

    includes traction motors, traction generators/alternators, transformers, substation

    equipment, vacuum circuit breakers, locomotive bogies, smoothing reactors, exciters,converters, inverters, choppers and associated control equipment, viz., master

    controllers, chopper controllers, brake and door equipment, electronic controls including

    software based controls extending to rolling stock and other transport applications. BHEL

    has manufactured and supplied a large number of 3900HP electric locomotives and

    4700HP AC/DC locomotives to Indian Railways and diesel-electric locomotives ranging

    from 350 HP to 2600 HP to cement, steel and fertilizer plants, thermal power stations

    coalfields, ports, and other medium and large industries and urban transportation

    projects. BHEL has also established itself as a leading supplier of state-of-the-art

    propulsion equipment to Indian Railways for 3-phase drive 6000 HP electric locos, 4000

    HP diesel-electric locos, electrical multiple units etc.

    Renewable EnergyBHEL has made rapid strides in this strategically important area of non-conventional

    energy, which holds the key to the problem of burgeoning energy needs, on the one

    hand and rapidly depleting fossil-based energy sources, on the other. Range of

    Renewable Energy product and systems manufactured and supplied includes a number

    of solar water heating systems, solar photo-voltaic (SPV) systems for both Domestic and

    Industrial application and wind electric generators all over India. BHEL also has the

    capability to set up Grid-connected and Hybrid SPV Power Plants. In addition, BHEL

    fabricates space-grade solar panels and space-quality batteries for satellites launched by

    ISRO. BHEL is also supplying small hydro power plants (up to 25 MW station capacity) for

    distributed power generation.

    The range of equipment covers onshore deep drilling rigs, super-deep drilling rigs, heli-

    rigs, work over rigs, mobile rigs and desert rigs with matching draw works and hoisting

    equipment. The diesel-electric oil rigs for onshore drilling made by BHEL are suitable for

    depths up to 9,000 meters.

    Transmission

    The products manufactured by BHEL include Power transformers, Instrument

    transformers, Dry type transformers, Shunt reactors, Vacuum and SF6 switchgear, Gas

    insulated switchgears, Ceramic insulators, etc. Major critical hardware such as capacitor

    banks, circuit breakers, control and protection equipment and thyristor valves are in its

    manufacturing range. BHEL has developed and commissioned indigenous 36KV and 145

    KV Gas Insulated Substation (GIS).

    International Business

    BHEL has, over the years, established its references in 70 countries across 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. The

    experience with these projects has provided BHEL the experience of working with world

    renowned consulting organizations and inspection agencies.

  • 7/28/2019 Sushil BHEL 03Feb10

    14/15

    February 01 , 2010 14

    Bharat Heavy Electricals Ltd.

    Source : Company, Sushil Finance Research Estimates

    PROFIT & LOSS STATEMENT Rs.mn

    Y/E March FY09 FY10E FY11E FY12E

    Net Sales 262123 322382 402977 503721

    Total Raw material 164685 196653 245816 304751

    Personnel Costs 29837 32820 36103 40074

    SG&A 18358 23211 29417 37779

    Others 12198 15152 18940 23675

    EBITDA 37046 54545 72701 97442

    Interest 307 300 350 450

    Depreciation 3343 4226 5518 6879

    Other Income 14604 14210 13510 14390

    Extraordinary items (489) - - -

    PBT 48489 64229 80343 104504

    Tax 17106 23122 28924 37621

    RPAT 31382 41106 51420 66882

    Extraordinary adj 262 - - -

    APAT 31120 41106 51420 66882

    BALANCE SHEET STATEMENT Rs.mn

    As on 31st

    March FY09 FY10E FY11E FY12E

    Share Capital 4895 4895 4895 4895

    Reserves & Surplus 124493 155300 195852 251295Net Worth 129388 160195 200747 256190

    Secured Loans - - - -

    Unsecured Loans 1494 1494 1494 1494

    Total Loan funds 1494 1494 1494 1494

    Deferred tax liability (18403) (24826) (32860) (43311)

    Capital Employed 112479 136863 169381 214373

    Net Block 15116 28890 42812 55934

    Cap. WIP 11570 10000 12000 15000

    Add: Lease Adjustment (412) - - -

    Investments 523.4 523.4 523.4 523.4

    Sundry Debtors 159755 198728 249515 313273

    Cash & Bank Bal 103147 101662 107376 120009

    Loans & Advances 24237 28714 35868 44835

    Inventories 78370 99673 127959 162812

    Other current assets 3502 3852 4238 4661

    Curr Liab & Prov 283329 335180 410910 502675

    Net Current Assets 85682 97450 114045 142916

    Total Assets 112479 136863 169381 214373

    KEY RATIOS STATEMENT

    Y/E March FY09 FY10E FY11E FY12E

    Growth (%)

    Net Sales 35.8 23.0 25.0 25.0APAT 8.9 32.1 25.1 30.1

    EBITDA 11.6 47.2 33.3 34.0

    Profitability (%)

    EBITDA Margin 14.1 16.9 18.0 19.3

    Adj. PAT Margin 11.9 12.8 12.8 13.3

    ROCE 30.1 33.1 33.7 35.0

    ROE 26.2 28.4 28.5 29.3

    Per Share Data (Rs.)

    Adj. EPS 63.6 84.0 105.0 136.6

    Adj. CEPS 60.7 79.5 99.9 129.3

    BVPS 264.3 327.3 410.1 523.3

    Valuations (X)

    PER 37.8 28.7 22.9 17.6

    PEG 4.3 0.9 0.9 0.6

    P/BV 9.1 7.4 5.9 4.6

    EV / EBITDA 29.0 19.7 14.7 10.9

    EV / Net sales 4.1 3.3 2.7 2.1

    Dividend Yield (%) 0.7 0.7 0.8 0.8

    Turnover Days

    Debtors days 222.5 225.0 226.0 227.0

    Creditors days 153.4 155.0 150.0 145.0

    Gearing Rations

    Total Debt to Equity - - - -

    CASH FLOW STATEMENT Rs.mn

    Y/E March FY09 FY10E FY11E FY12E

    PAT 31382 41106 51420 66882

    Depreciation &

    Amortization3102 4226 5518 6879

    Chg in Deferred tax (5024) (6423) (8034) (10450)

    Chg in Working cap 12444 (13253) (10881) (16238)

    Cash flow from

    operations41904 25657 38022 47072

    Chg in Gross PPE (7814) (18000) (19440) (20000)

    Chg in WIP (4989) 1570 (2000) (3000)

    Chg in Investments (441) 0 0 0

    Chg in others (179) (412) 0 0

    Cash flow from

    investing(13423) (16843) (21440) (23000)

    Chg in debt 542 - - -

    Chg in Share Capital - - - -

    Chg in reserves - 10 14 15

    Dividend (9736) (10309) (10882) (11455)

    Cash flow from

    financing(9194) (10299) (10868) (11440)

    Chg in cash 19287 (1485) 5714 12633

    Cash at start 83860 103147 101662 107376

    Cash at end 103147 101662 107376 120009

  • 7/28/2019 Sushil BHEL 03Feb10

    15/15

    February 01 , 2010 15

    Bharat Heavy Electricals Ltd.

    Rating Scale

    This is a guide to the rating system used by our Equity Research Team. Our rating system

    comprises of six rating categories, with a corresponding risk rating.

    Risk Rating

    Risk Description Predictability of Earnings / Dividends; Price Volatility

    Low Risk High predictability / Low volatility

    Medium Risk Moderate predictability / volatility

    High Risk Low predictability / High volatility

    Total Expected Return Matrix

    Rating Low Risk Medium Risk High RiskBuy Over 15 % Over 20% Over 25%

    Accumulate 10 % to 15 % 15% to 20% 20% to 25%

    Hold 0% to 10 % 0% to 15% 0% to 20%

    Sell Negative Returns Negative Returns Negative Returns

    Neutral Not Applicable Not Applicable Not Applicable

    Not Rated Not Applicable Not Applicable Not Applicable

    Please Note

    enhanced our return criteria for such stocks by five percentage points.

    Desk Research Call is based on the publicly available information on the companies we find interesting and arequoting at attractive valuations. While we do not claim that we have compiled information based on our meeting with

    the management, we have taken enough care to ensure that the content of the report is reliable. Although we have

    christened the report as Desk Research Calls (DRC), we intend to release regular updates on the company as is donein our other rated calls.

    Additional information with respect to any securities referred to herein will be available upon request.

    This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated,

    published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express

    consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public

    dissemination of information contained herein is prohibited. This report is to be used only by the original recipient towhom it is sent.

    This is for private circulation only and the said document does not constitute an offer to buy or sell any securities

    mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its

    accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors arerequested to use the information contained herein at their own risk.

    This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell anysecurity. It does not purport to be a complete description of the securities, markets or developments referred to in the

    material. The information, on which the report is based, has been obtained from sources, which we believe to bereliable, but we have not independently verified such information and we do not guarantee that it is accurate or

    complete. All expressions of opinion are subject to change without notice.

    Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and

    employees (to be collectively known as SFSPL), may, from time to t ime, have a long or short position in the securities

    mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein priorto the publication thereof.