BHEL: Interactions with CMD; Rational competition for NTPC bulk tender for turbines (7.2GW); BHEL bid 8% above L1
NTPC opened price bids for the turbine-generator (TG) package of its Rs250b bulk-tender to set up 11 units (including two units of DVC) of 660 MW supercritical power projects on October 8. We believe BHEL (BHEL IN, MCap US$27.9b, CMP Rs2,581, Buy) will get a minimum of four units, in line with our expectations.
We spoke to the Chairman of BHEL, Mr B P Rao, to get his view on the outcome. Following are the takeaways:
- Based on ‘read out’ prices (i.e. prices quoted by the bidders), Alstom-Bharat Forge Joint Venture is the lowest bidder (at Rs13m/MW) and will have the right to chose first two projects (maximum of 4 or 5 units of 660MW each).
- BHEL is second lowest bidder (8% higher than Alstom-Bharat Forge) and will have the right to choose the next two projects (4 or 5 units of 660MW each). BHEL will have to match the L1 price.
- Toshiba is the third lowest bidder and will get one project (2 units of 660MW each). Toshiba has quoted significantly higher price (~25% higher than BHEL).
- If L3 bidder decides to opt out, allocated project will be executed by BHEL. As in earlier case, BHEL will have to match the L1 price.
We expect BHEL to win six units at good margins
- BHEL’s price is in line with its recent bids for supercritical projects. Margins are expected to be healthy. Also, the prices are much better than Rs9.7m/MW bid by L&T-Mitsubishi in Aug 2008 for the AP Genco order. Post this, while steel prices are down, bid values have increased meaningfully.
- Difference between quotes of BHEL and Alstom-Bharat Bharat Forge JV is expected to narrow down substantially after detailed evaluation by NTPC. NTPC penalizes the supplier of less efficient machines, by loading on the ‘read out’ prices, according to well-defined mechanism. In such a situation, BHEL will have to only marginally lower its prices to match L1 bid.
- As we do not expect Toshiba to match the L1 price, BHEL is likely to win a minimum of six units, in our view.
Orders expected to be placed in next 2-3 months; boiler package to follow
- NTPC is likely to take a month’s time to evaluate price bids, following which they will begin the process of awarding the contracts
- The process of awarding boiler package is also underway. BHEL, L&T, BGR Energy-Hitachi JV and Ansaldo are in the fray for the same.
- We expect Letter-of-Awards to be placed by March 2012 for both boiler and turbines.
- NTPC is also expected to initiate process of another of its bulk tender 9 x 800 MW, by end FY11.
The NTPC bulk tender: an important development
- After a lot of deliberations, NTPC had recently invited bids for sourcing power plant equipment (boiler and TG) for 11 supercritical units of 660MW. According to bid condition, bidders are expected to set up manufacturing plant for the equipments at over a period of time, under phase manufacturing program.
- After technical evaluation, BHEL, Alstom-Bharat Forge JV, Toshiba and PowerMachines of Russia were short listed for TG package. BHEL, L&T, Ansaldo and BGR-Hitachi JV qualified for the bolier package.
Expect strong order-flows, leading to 24% revenue CAGR
- We expect BHEL to post earnings of 24% CAGR over FY10- 12, in line with revenue CAGR of 22%. We expect adjusted EBITDA margin expansion of 250bp over FY10-12, as staff costs (as a percentage of revenue) are expected to fall by 505bp over the period.
- The quality of earning is set to improve, with EBITDA growth of 36% CAGR over FY10-12 along with superior RoE's of 33% and 54% over FY11 and FY12.
Valuation and view
- BHEL at CMP of Rs2,581 trades at 17x FY12E earnings, and EV/EBITDA at 10x FY12E. BHEL currently trades at around 12% premium to the broader market which has come down from 20% over the last two years. Over the past two years, the premium has significantly shrunk on account of concerns on order-flow stagnation, competition from other private players like L&T and also BHEL’s ability to garner and maintain its market share in the super-critical BTG sets in the Twelfth Plan.
- We believe that with likely upside to order inflows over the next one year, most of these concerns will be allayed. We re-iterate Buy with a target price of Rs2,934, based on 20x FY12E earnings.
No comments:
Post a Comment