UBS: BHEL - Buy; Quality name at attractive valuations

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UBS Investment Research
Bharat Heavy Electricals Limited
Quality name at attractive valuations


􀂄 BHEL is trading at the lower end of its historical valuation range
BHEL is currently trading at 15.2x one-year forward EPS, which is at a 27%
discount to the 5-year average. The current valuation multiple is towards the lower
end of the historical PE range and we see this is an attractive opportunity to buy a
high quality company, which we think is trading at very reasonable valuations.

􀂄 BHEL board has approved plan to set up NBFC
As per media reports, the board of BHEL has approved the company’s plan of
starting a non-banking financial company (NBFC) to finance power projects. We
believe there could be two key objectives behind this move: 1) to secure a larger
share with better margins for main plant orders in the state projects; and 2) to get
higher returns on its cash reserves (BHEL is net cash company). Please refer to our
note ‘NBFC venture could be a positive’ dated 8 September 2010.

􀂄 We expect NTPC bulk order to be awarded in next three months
NTPC is likely to complete the award of main plant equipment orders for 11 sets of
660MW in FY11. The reasonable pricing of Turbine-Generator (TG) package for
which financial bids were opened in October is a positive development for BHEL,
in our view. Please refer to our note ‘Bulk tendering order: good pricing’ dated 11
October 2010.

􀂄 Valuation: maintain Buy and our top pick in India Capital Goods space
Our three-stage DCF-based price target is Rs2,950. Our key assumptions are: a) a
WACC of 11.9%; b) intermediate growth rate of 15% and long-term growth rate of
5%; and c) margins of 20% for intermediate and 18% for terminal phase.

BHEL—Looks attractive on valuations
BHEL is currently trading at 15.2x one-year forward EPS, which is at a 27%
discount to 5-year average. The current multiple is also towards the lower end of
the historical valuation range and we see this is an attractive opportunity to buy
a high quality company trading at reasonable valuations.


Conclusion
We remain positive on the stock and maintain our Buy rating. The near-term
triggers could be an NTPC bulk order and strong Q3 results.
We maintain BHEL as our top pick in the Indian Capital Goods space. We
believe it is a high quality and good defensive stock available at very attractive
valuations.