RBS on BHEL: Buy, TP raised to Rs2,981

Bharat Heavy Electricals
Stronger for longer
A possible extension of the regulated tariff regime should benefit BHEL, as we
believe it would translate into sustained order flows from NTPC. The current
order book is robust and we expect strong order flows to continue in FY11. We
re-iterate BHEL as our top pick in the space and maintain our Buy rating.


Potential extension of regulated tariff regime should benefit BHEL, in our view
As per the National Tariff Policy, NTPC is due to be brought under the competitive tariff
regime in January 2011, but has made an application to the Ministry of Power for an
extension of the regulated tariff regime, which assures it a 15.5% RoE. Based on our industry
channel checks, it appears the Ministry of Power is favourably inclined to an extension of the
regulated tariff regime, as it feels the private sector may lag in capacity creation. This would
mean NTPC would not have any immediate pressure on costs, allowing it to focus on
lifecycle costing and not the upfront equipment cost, which in our view should help BHEL
continue to win orders.
Strong order flows should continue in FY11F; order book remains robust
The outlook for FY11 remains strong, as orders for the 12th five-year plan start to pick up.
NTPC is planning a further tender for 9x800MW supercritical capacity in addition to its bulk
tender for 11x660MW. The company is progressing well on order conversion of its joint
ventures with states. We expect private sector orders to be strong as well for BHEL in FY11.
All these factors give us confidence in the company’s ability to meet its FY11 inflow guidance
of Rs600bn. The current order book stands at Rs1.48trn, which is 4.4x FY10 sales and
provides strong medium-term visibility.
Remains our top pick in the sector; maintain Buy, TP raised to Rs2,981
We maintain our estimates for FY11-13. However, given the enhanced visibility, we increase
the medium-term estimates in our DCF, which raises our target price to Rs2,981, a change of
6% from our previous target price of Rs2,793. We continue to like BHEL and remain
confident in its ability to maintain its leadership and profitability, even in this increasingly
competitive industry. In this regard, we watch keenly the upcoming NTPC tender for bulk
supercritical equipment. A key risk would be the non extension of the regulated tariff regime
for NTPC.