BHEL: Key takeaways from Sep-q conference call, growth on track: JPMorgan

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Bharat Heavy Electricals (BHEL)
Overweight
BHEL.BO, BHEL IN
Key takeaways from Sep-q conference call, growth on
track



• In a sweet spot post 1HFY11, but management does not revise growth
target upwards. BHEL targets ~Rs500B of gross revenues in FY12-
unchanged, implying 20.4% growth CAGR through FY10-12 (JPMe. of
Rs508B). We expect a pick up in topline growth in 2HFY11 to 23% vs.
21.2% in 1H, and PAT growth of 26.3% for the balance fiscal. Growth is
well on track, and with order inflows of Rs336B YTD, BHEL’s target of
Rs600B for FY11 can be comfortably met, in our view.
• Private & public inflows in equal measure. YTD sub-critical BTG orders
from private sector have been strong, notably Indiabulls (~Rs58B); Rs25-
27B orders each from Dainik Bhaskar, Abhijeet Infra and Visa Power. We
have not witnessed a dip in per MW realization for both public and private
orders. In the balance fiscal BHEL expects to bag large public sector orders-
(1) share of NTPC-DVC bulk tenders (~Rs80B), (2) orders from state JVs-
3x800MW (~Rs100B). BHEL expects mix of private and public orders at
50:50 for FY11, vs. 90:10 during FY10. BHEL is looking to formalize JVs
with ~7-8 more states and bag supercritical orders on nomination basis.
• Growth JVs: BHEL expects JV with Toshiba for EHV and UHV T&D
equipment to be formalized in 1QCY11; plans to form JV with NPCIL for
joint execution of nuclear power projects on EPC basis awaits govt. nod.
• Plays down recent mega orders placed on Chinese by RPWR and
Lanco- It does not expect all these orders to materialize into contracts.
Also, mgmt does not consider that inflows have peaked for BHEL, and
further capacity expansion plan to 20GW factors in robust growth
expectation.
• Marginal upward revision to estimates. Post strong Sep-q, our EBITDA
est. are up 3-4% in FY11-12, however higher capex guidance (Rs16B in
FY11, Rs14B in FY12) has increased our depreciation est., leading to lower
increase in PAT estimates (2.3% in FY11 and 1.1% in FY12).
• Maintain OW. Our DCF based Sep-11 PT of Rs2780 up marginally,
implies 20.2x FY12 EPS. The stock is trading at 17.8x at a 21% discount to
L&T. Evidence of sharply lower realizations/even lower margins on IPP
orders is a key downside risk.