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Bharat Heavy Electricals (BHEL) reported robust PAT (adjusted) growth of
25% Y-o-Y to INR 13.4 bn, in line with our estimate. Revenue (adjusted for
change in revenue recognition method) grew 19% to INR 85.8 bn. Core
EBITDA margin expanded 136bps Y-o-Y to 23.0%. New orders declined
during Q3FY11 and 9mFY11 by 24% and 2% Y-o-Y to INR 122 bn and
INR 364 bn, respectively, implying order book growth of 16% Y-o-Y to
INR 1,580 bn (3.8x FY11E sales). Management expects ordering to remain
strong over the next 2-3 quarters based on the current bid pipeline.
Execution below estimate; margin expands
BHEL reported revenue growth of 24.8% to INR 90.2 bn in Q3FY11 led by a
strong 27.6% Y-o-Y growth in the power segment (contributes 77% to total
revenues), and industry, which grew 18.9% Y-o-Y. For 9mFY11, it reported
22.9% Y-o-Y revenue growth, with the power segment growth at 25.1% Y-o-Y
and industry growth at 15.8% Y-o-Y. We expect BHEL to post 27.7% Y-o-Y
growth in Q4FY11 revenues, given the lumpy execution expected in Q4FY11. PAT
for the quarter grew 30.8% led by both margin expansion and lower tax rate.
Order inflow disappoints; encouraging bid pipeline
The company disappointed with 24% decline in order inflows at INR 122 bn
during Q3FY11. For 9mFY11 order inflows stood at INR 364 bn, a 2% dip. Given
the slow order inflows during 9mFY11 due to several deferred orders which are
likely to materialise by March 2011, we expect order inflow to pick up in Q4FY11.
Update on power and other JVs; momentum in other business
BHEL is looking at increasing its industry revenue through various JVs. The
company expects order inflows from its power JVs with Tamil Nadu and
Maharashtra during Q1FY12 and FY12, respectively. It continues to work in newer
growth areas like renewables, transmission, transportation, and NBFC. BHEL
expects railways to be a big growth area going forward.
Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on the stock due to: (a) the expected strong order pipeline
over the next few quarters; (b) the first mover advantage in supercritical
equipment, thus indigenising earlier than competition; and (c) attractive
valuations at current levels. The stock currently trades at P/E of 19.7x and 15.7x
on FY11E and FY12E, respectively. We reiterate our ‘BUY/Sector
Outperformer’ recommendation/rating with BHEL as our top pick in the capital
goods sector.
Ordering to improve in Q4FY11; LoIs expected in Q4FY11
BHEL emerged as the lowest bidder in two projects of 2x660MW to be set up by
Rajasthan SEB at Suratgarh and Chabra where it competed with BGR Energy and Power
Machine of Russia. We expect the company to receive LoI for atleast one of the two
power projects worth INR 61 bn each during Q4FY11, in case the SEB opts not to award
both projects to the L1 bidder, as per original tender conditions. BHEL’s bid is lower than
BGR in both the contracts by a significant margin.
Further, the company was L2 in NTPC’s bulk tender of 11x660MW turbine generator.
The company is expected to bag 4 / 5 turbine-generator orders given that it matches the
price quoted by the lowest bidder, i.e., Bharat Forge-Alstom.
Change in assumptions: In line with recent management guidance, we are raising our
employee cost assumption for FY11 and FY12 by 4.5% each. We also lower our average
tax rate assumption based on lower tax rate for 9mFY11. However, there is no material
impact on our EPS for FY11E and FY12E on account of these changes
Company Description
BHEL is the largest engineering and manufacturing enterprise in India in the energyrelated/
infrastructure sector. It manufactures over 180 products under 30 major product
groups and caters to core sectors of the Indian economy viz., power generation and
transmission, industry, transportation, telecommunication, and renewable energy. BHEL
has a wide network with 14 manufacturing divisions, four power sector regional centers,
over 100 project sites, eight service centers, and 18 regional offices across the country.
An extensive network enables the company to promptly serve its customers and provide
them with suitable products, systems, and services. It has acquired and adopted some of
the best technologies from leading companies globally, besides developing technologies
at its own R&D center.
Investment Theme
Given the improving visibility and the government’s thrust on power sector reforms, we
expect addition of ~55-62 GW of generation capacity in India over the Eleventh Plan,
entailing an investment of ~INR 4.2 tn. Of the above capacity addition, ~65% plus is
estimated to be from thermal-based power plants. This is a positive for BHEL as its forte
lies in setting up coal-based power plants. BHEL has also demonstrated its skill in hydro
power projects. Further, to cater to the country’s ambitious future power-capacity
addition programme, BHEL is also planning to increase its capacity to 20,000 MW by
March 2012 from the existing 15,000 MW.
Key Risks
In the past, the domestic power sector has not kept pace with the growth in demand,
which resulted in energy shortage. Any slowdown in power reforms can impact BHEL, as
it has 65% market share in country’s total installed capacity.
In the domestic market, BHEL is facing stiff international competition, particularly from
Chinese power plant equipment (PPE) manufacturers, who have twin advantages of
economies of scale and global reach.
With order book growth surging at record levels, any delay in execution of projects could
hamper margins.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals (BHEL) reported robust PAT (adjusted) growth of
25% Y-o-Y to INR 13.4 bn, in line with our estimate. Revenue (adjusted for
change in revenue recognition method) grew 19% to INR 85.8 bn. Core
EBITDA margin expanded 136bps Y-o-Y to 23.0%. New orders declined
during Q3FY11 and 9mFY11 by 24% and 2% Y-o-Y to INR 122 bn and
INR 364 bn, respectively, implying order book growth of 16% Y-o-Y to
INR 1,580 bn (3.8x FY11E sales). Management expects ordering to remain
strong over the next 2-3 quarters based on the current bid pipeline.
Execution below estimate; margin expands
BHEL reported revenue growth of 24.8% to INR 90.2 bn in Q3FY11 led by a
strong 27.6% Y-o-Y growth in the power segment (contributes 77% to total
revenues), and industry, which grew 18.9% Y-o-Y. For 9mFY11, it reported
22.9% Y-o-Y revenue growth, with the power segment growth at 25.1% Y-o-Y
and industry growth at 15.8% Y-o-Y. We expect BHEL to post 27.7% Y-o-Y
growth in Q4FY11 revenues, given the lumpy execution expected in Q4FY11. PAT
for the quarter grew 30.8% led by both margin expansion and lower tax rate.
Order inflow disappoints; encouraging bid pipeline
The company disappointed with 24% decline in order inflows at INR 122 bn
during Q3FY11. For 9mFY11 order inflows stood at INR 364 bn, a 2% dip. Given
the slow order inflows during 9mFY11 due to several deferred orders which are
likely to materialise by March 2011, we expect order inflow to pick up in Q4FY11.
Update on power and other JVs; momentum in other business
BHEL is looking at increasing its industry revenue through various JVs. The
company expects order inflows from its power JVs with Tamil Nadu and
Maharashtra during Q1FY12 and FY12, respectively. It continues to work in newer
growth areas like renewables, transmission, transportation, and NBFC. BHEL
expects railways to be a big growth area going forward.
Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on the stock due to: (a) the expected strong order pipeline
over the next few quarters; (b) the first mover advantage in supercritical
equipment, thus indigenising earlier than competition; and (c) attractive
valuations at current levels. The stock currently trades at P/E of 19.7x and 15.7x
on FY11E and FY12E, respectively. We reiterate our ‘BUY/Sector
Outperformer’ recommendation/rating with BHEL as our top pick in the capital
goods sector.
Ordering to improve in Q4FY11; LoIs expected in Q4FY11
BHEL emerged as the lowest bidder in two projects of 2x660MW to be set up by
Rajasthan SEB at Suratgarh and Chabra where it competed with BGR Energy and Power
Machine of Russia. We expect the company to receive LoI for atleast one of the two
power projects worth INR 61 bn each during Q4FY11, in case the SEB opts not to award
both projects to the L1 bidder, as per original tender conditions. BHEL’s bid is lower than
BGR in both the contracts by a significant margin.
Further, the company was L2 in NTPC’s bulk tender of 11x660MW turbine generator.
The company is expected to bag 4 / 5 turbine-generator orders given that it matches the
price quoted by the lowest bidder, i.e., Bharat Forge-Alstom.
Change in assumptions: In line with recent management guidance, we are raising our
employee cost assumption for FY11 and FY12 by 4.5% each. We also lower our average
tax rate assumption based on lower tax rate for 9mFY11. However, there is no material
impact on our EPS for FY11E and FY12E on account of these changes
BHEL is the largest engineering and manufacturing enterprise in India in the energyrelated/
infrastructure sector. It manufactures over 180 products under 30 major product
groups and caters to core sectors of the Indian economy viz., power generation and
transmission, industry, transportation, telecommunication, and renewable energy. BHEL
has a wide network with 14 manufacturing divisions, four power sector regional centers,
over 100 project sites, eight service centers, and 18 regional offices across the country.
An extensive network enables the company to promptly serve its customers and provide
them with suitable products, systems, and services. It has acquired and adopted some of
the best technologies from leading companies globally, besides developing technologies
at its own R&D center.
Investment Theme
Given the improving visibility and the government’s thrust on power sector reforms, we
expect addition of ~55-62 GW of generation capacity in India over the Eleventh Plan,
entailing an investment of ~INR 4.2 tn. Of the above capacity addition, ~65% plus is
estimated to be from thermal-based power plants. This is a positive for BHEL as its forte
lies in setting up coal-based power plants. BHEL has also demonstrated its skill in hydro
power projects. Further, to cater to the country’s ambitious future power-capacity
addition programme, BHEL is also planning to increase its capacity to 20,000 MW by
March 2012 from the existing 15,000 MW.
Key Risks
In the past, the domestic power sector has not kept pace with the growth in demand,
which resulted in energy shortage. Any slowdown in power reforms can impact BHEL, as
it has 65% market share in country’s total installed capacity.
In the domestic market, BHEL is facing stiff international competition, particularly from
Chinese power plant equipment (PPE) manufacturers, who have twin advantages of
economies of scale and global reach.
With order book growth surging at record levels, any delay in execution of projects could
hamper margins.
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