BHEL - Strong Performance, Clear Path Ahead; BUY : Emkay

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BHEL

Strong Performance, Clear Path Ahead; Retain BUY

BUY

CMP: Rs 2,446                                       Target Price: Rs 3,030

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n     BHEL report strong performance – Revenues up 26% yoy to Rs87.2 bn, EBITDA margins improve 60 bps yoy to 17.7%, Net profits increase 33% yoy to Rs11.4 bn

n     Bagged orders worth Rs200 bn during Jul-Oct’10 – achieved 50% of FY11E target orders. Order book at Rs1537 bn

n     H1FY11 performance on all counts, gives comfort to  achieve FY11E estimates – enhances probability of earnings upgrade

n     Maintain earnings estimates of FY11E (Rs110.6/Share) and FY12E (Rs129.0/Share)- with target price of Rs3,030/Share

BHEL reports strong performance – revenues up 26%, EBITDA margins

up 60 bps yoy and APAT up 33%

Led by strong revenue booking and improvement in operating margins, BHEL reported

strong operational performance in Q2FY11. Net revenues grew by 25.7% yoy to Rs87.2

bn, led by power segment up 28.3% yoy to Rs69.6 bn. Whereas, Industrial segment

grew by 16.4% yoy to Rs18.6 bn. BHEL’s EBITDA grew by 30.2% yoy to Rs14.7 bn with

60 bps yoy improvement in EBITDA margins to 17.7%, ahead of estimates. Expansion

in EBIDTA margins was driven by levarge in the business. The APAT growth at 33.2%

yoy to Rs11.4 bn – was ahead our estimates.

Bagged Rs200 bn order during Jul-Oct’10– achieved 50% of FY11E target

BHEL’s order book increased to Rs1,537 bn (up 22% yoy) on back of order inflows

worth Rs135 bn (2800 MW). Further BHEL has bagged orders worth Rs65 bn in Oct’10

– thus achieving 50% of FY11E target order inflows. Major orders received includes –

(1) Karnataka Corporation Bellary III - 1x700 MW (2) Raichura Power Plant – 1x800 MW

(3) Visa Power – 2x600 MW (4) AP Genco Rayalseema – 1x600 (5) Indiabulls Power –

Nasik II (5x270 MW & Amravati II (5x270 MW).

BHEL headed on right path- directionally correct

H1FY11 performance on all counts, gives adequate comfort for achieving FY11E

estimates. Some key observations are as under (1) employee costs which are generally

difficult to project have nailed down at Rs52-53 bn for the year, removing all ambiguity

(2) revenue booking has been impressive recording 21% yoy growth in H1FY11- with

H2FY11 traditionally being stronger then H1FY11 (3) negated occurrence of any oneoffs

expenses for FY11E and (4) received order inflows of Rs320 bn until October 2010,

which is approximately 50% of target order inflows. Further, BHEL is comfortably placed

to achieve annual revenues of Rs398.5 bn translating into growth of 21%.

Maintain earnings for FY11E and FY12E, Maintain 'BUY'

Citing satisfactory performance in H1FY11 with BHEL directionally moving on right path,

probability of earnings upgrades in ensuing quarters has emerged. Currently, we

maintain earnings estimates of Rs110.6/Share and Rs129.0/Share for FY11E and

FY12E respectively. We continue to value BHEL on FY06-08 average PER of 23.5X

FY12E- with target price of Rs3,030/Share