BHEL: Withering market share:: Macquarie

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Bharat Heavy Electricals
Withering market share
Event
 A couple of private power producers have placed very large-sized BTG (boiler
turbine and generator) awards with Chinese players. In our view this clearly
highlights that foreign competition, especially Chinese, remains a credible
threat to the Indian manufacturers, especially BHEL We retain our cautious
stance on the stock with a Neutral rating and target price of Rs2,297.
Impact
 35,000MW thermal orders awarded to Chinese suppliers in recent past:
Reliance Power has given a US$8.3bn contract to Shanghai Electric for
supplying 36 BTG sets of 660MW over the next ten years. Similarly, Lanco
Infratech had announced a similar contract to Harbin for supply of 16 sets of
660MW BTG equipment in mid-September.
Real concern is loss of long-term market share rather than pricing:
The market has been focussing on lower price/MW due to different scope
of work and, hence, the assumption is that competition is still benign.
However, we are concerned about a permanent loss of market share for
BHEL. The planned capacity addition over the next ten years could be
around 250GW, of which 14% has been awarded to Chinese equipment
players in these contracts. Moreover, incremental generation capacity
would have a higher proportion of hydro, gas and nuclear, where BHEL
has little market share.
Reliance Power looking to set up manufacturing capacity along with
Shanghai Electric: Reliance Power has announced its intent to enter into
manufacturing in India in a tie-up with Shanghai Electric. This would
further add manufacturing capacity in a scenario where this space is
potentially heading for oversupply over the next three to four years.
Losing forte in gas-based power plants: Reliance Power recently
placed a US$2.4bn contract with General Electric for 2,400MW gas-fired
power equipment. Similarly, all the gas-based projects announced in the
recent past have been placed with suppliers other than BHEL.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs2,297.00 based on a PER methodology.
 Catalyst: Large order wins by competition at lower pricing in next 2–3 quarters.
Action and recommendation
 Order inflow / backlog growth to stagnate, putting pressure on
sustainable revenue growth: We believe that annual order inflow for BHEL
is unlikely to exceed 15,000MW as competition intensifies. This would lead to
a stagnant order inflow and, hence, order book, which we estimate would lead
to a decline in revenue growth in FY12 and beyond.
 Stock looks expensive at 19.5x FY12E EPS with single-digit growth in
FY13E: We remain cautious on BHEL, as it is still trading at 19.5x FY12E,
which looks rich given that the company should have single-digit earnings
growth in FY12E due to margin pressure and declining revenue growth.