JM Financial: BHEL: Competition benign on stronger Yen vs Euro

BHEL: Competition benign on stronger Yen vs Euro
􀂄 NTPC bulk tender indicates benign competition: Financial bids for NTPC
bulk TG tender (11x660MW – 5 projects) opened on 8th October. Bharat Forge
– Alstom (BF-A) turned L1 with c.`12mn/MW, BHEL was L2 with c.`13mn/MW
and JSW-Toshiba (JSW-T) was L3 with c.`16mn/MW. Bid prices indicate 3
trends - a) BHEL wants to maintain its margins and hence, has not bid
aggressively, b) 20-25% increase in TG bids in last two years indicate benign
pricing, and c) JSW-T’s 30% higher bid indicates lesser threat from Japanese-JV
suppliers (like JSW-T and L&T-MHI) on c.13% Yen appreciation vs Euro
(European supplier for BHEL-Siemens and BF-A), in INR terms.


􀂄 Award price could be between BF-A and BHEL’s bid price: While bid prices
between L1 and L2 have 7-8% differential, we expect final bid price gap to
have c.5% differential on BF-A’s higher import content loading (for forex
variation) vs BHEL. Hence, we believe order placement would be at
c.`12.5mn/MW.
􀂄 BHEL likely to get 7 units (4,620MW): As per the bid documents, bidders
were required to quote for all 5 projects under reckoning and all 3
participants were assured atleast one project, but at L1 price bid. L1 has been
decided on average price of the 5 projects. 2 projects, where the differential
is maximum, will be awarded to L1 (industry checks suggest BF-A is likely to
get 2 units at Solapur and 2 units at Meja). Also, BHEL will have first right of
refusal for L3 project, in case JSW-T doesn’t match L1 price (which looks
unlikely on c.30% differential). Hence, we expect 7 units with `58bn order
inflow for BHEL, higher than street expectations. BUY BHEL (TP: `3,000).