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Bharat Heavy Electricals
Rock solid
BHEL reported 3Q11 earnings in line with our estimates. We believe the inherent
advantages should allow the company to maintain its dominant position in the
equipment industry, despite increasing competition. Buy maintained with a
revised TP of Rs2,601.
3Q11 earnings in line with estimates; on track to meet FY11 guidance
BHEL reported 3Q11 earnings in line with our estimates, with adjusted profit for the quarter
coming in at Rs13.4bn (up 26% yoy). The company reported an order backlog of Rs1.58trn
(up 18% yoy), implying 9M11 inflow of Rs365bn. We expect the FY11 inflow guidance of
Rs600bn to be comfortably met, with NTPC likely to award supercritical orders in 4Q11.
Financing a key factor in private orders, but BHEL has its share of customers
Based on our discussions with private IPPs, we believe cheaper Chinese financing is a key
reason for them to place orders with Chinese vendors. While most private IPPs are prepared
to consider Chinese vendors, two large IPPs indicated they were unwilling to do so, citing
issues related to quality and good post-installation support. The private sector accounted for
90% of BHELís power sector inflows in FY10 and at least 25-30% inflow to date.
We expect pricing to be benign in state orders; favourable for margins
Our discussions with industry players indicate that a price war is unlikely as the market has
only three to four players currently. This corroborates our view that BHEL would be the only
player likely to benefit from a price war. Its recent bid for two 2x660MW projects in Rajasthan
indicates its competitiveness against private players, while the turbine pricing for the bulk
tender indicates a benign pricing environment at Rs13m/MW.
Defensive pick in a volatile market. Maintain Buy
Power sector capex remains resilient despite the slowdown in other sectors. BHEL is the
only company in our coverage universe whose short-term growth outlook we would expect to
remain unaffected even if order inflows slowed. We forecast an earnings CAGR of 21% over
FY11-13. The stock trades at a PE of 16x FY12F. We build in higher risk-free rates, which
raises our WACC assumption. This reduces our target price to Rs2,601 (from Rs2,981).
Rock solid
BHEL reported 3Q11 earnings in line with our estimates. We believe its inherent
advantages should allow the company to maintain its dominant position in the equipment
industry, despite increasing competition. Buy maintained with a revised TP of Rs2,601.
3Q11 results in line with estimates
BHEL reported 3Q11 numbers in line with our estimates. Revenue for the quarter came in at
Rs90.2bn, up 25% yoy. The EBITDA margin rose 136bp yoy to 23% aided by lower staff costs
and lower raw material costs as a proportion of net sales. Other income declined to Rs1.5bn
(down 21% yoy). PBT was reported at Rs20.7bn (up 26% yoy), while adjusted profit came in at
Rs13.4bn (up 26% yoy), in line with our estimates.
Order book expands to Rs1.6trn; on track to meet FY11 inflow guidance
The company reported an order backlog of Rs1.58trn (up 18% yoy, up 3% qoq), implying order
inflow of Rs122bn for the quarter (down 22% yoy, down 10% qoq). The 9M11 inflow of Rs365bn
implies that the company now needs inflows of around Rs230bn in 4Q11 (vs Rs229bn in 4Q10) to
meet its guidance of Rs600bn for FY11. We note that the company is already the lowest bidder in
two large orders in Rajasthan that are likely to be awarded in 4Q11.
With these potential orders and the supercritical orders that NTPC is likely to award during 4Q11,
we thus believe BHEL will comfortably meet its inflow guidance. The order inflow is likely to
remain strong in FY12: management said at the 3Q11 conference call that it expected higher
inflows in FY12 than FY11.
Decline in raw material costs led to margin improvement
Raw material costs declined on a yoy basis to 53.3% of net sales (down 122bp yoy), resulting in
the margin rising to 23% for 3Q11 (up 136bp yoy). However, other expenses rose sharply to
Rs7.9bn (up 59% yoy, up 26% qoq); this included a provision of Rs1bn on account of liquidated
damages. Overall for 9MFY11, the margin expanded 211bp yoy to 19.4% due to a dip in both raw
material costs and staff costs as a proportion of net sales.
Continued growth in Power and Industry
The companyís power segment registered another strong quarter with revenues growing to
Rs73bn (up 28% yoy), while the industrial segment reported revenue of Rs21.4bn (up 19% yoy)
for the quarter. Overall, for 9MFY11, power segment grew to Rs196.5bn (up 25.1% yoy), while
Industry segment reported revenues of 54.8bn (up 16% yoy).
Competition heating up for private orders
The end-user industry for power equipment is split vertically into two categories: private IPPs and
state and central utilities. For private IPPs, the competition is between BHEL and Chinese
vendors. In state utilities, it is between BHEL and new joint ventures such as Larsen & ToubroMitsubishi and BGR Hitachi.
Our discussions with industry players suggest that decisions to use Chinese vendors are now
typically based more on equipment delivery timing than on price, which had been the appeal in the
past. The price differential between BHEL and Chinese vendors has narrowed, but there is still a
12-month gap in delivery in favour of the Chinese. However, with BHEL expanding its capacity
from the current 15GW to 20GW by 2012, it should be able to offer better lead times. Our
discussions also suggest the cheaper financing available to these private players from China
Eximbank is another key factor in their decision-making.
In the state and central utilities, price is key. However, a price war is unlikely as the market has
only three to four players currently. The recent Rajasthan orders indicate BHELís competitiveness
against private players, while the turbine pricing for the bulk tender indicates a benign pricing
environment. In FY10, the private sector accounted for 90% of power sector inflows for BHEL and
in current year this accounts for c25-30% of order inflows.
BHEL best placed among domestic players
There has been an increase in competition in the domestic sector with a number of new players
entering the market. However, we remain confident in BHELís inherent advantage. We believe it is
likely to remain the main player for public sector orders. As mentioned earlier, BHEL is likely to
compete with other domestic private players for public sector orders from whom we feel it unlikely
to face significant threat for two key reasons: 1) BHEL enjoys a cost advantage as it has fullydepreciated capacity and is undergoing brownfield expansion for new capacities; and 2) BHEL
has a strong vendor base which is unmatched by any private players. In addition, the companyís
strategy of establishing JVs with state utilities is likely to provide stability to inflows.
However, we feel that margins for the company may not remain at current levels in the event of
aggressive pricing by private players. In such a scenario, we believe BHEL can compete given its
inherent cost and market positioning advantages. However, we do not expect a significant dip in
margins over the next three years, as we believe its current order book consists of higher margins
projects. In addition, our discussions with industry players indicate that a price war is unlikely as
the market has only three to four players. In that case, the other main reason BHELís margins
might dip could be the absorption of super-critical technology.
Defensive pick in a volatile market: Buy maintained
Power sector capex has remained resilient despite the slowdown in other sectors. In addition,
NTPC has recently signed a power purchase agreement for an additional 67GW, which effectively
takes care of its expansion for the 12th and 13th Five Year Plan and augurs well for BHEL in the
medium term. BHEL is the only company in our coverage universe where the short-term growth
outlook growth remains unaffected even if order inflows slow down. We expect the company to hit
a CAGR of 21% over FY11-13F. The stock trades at 16xFY12F. We also build in higher risk free
rates which increases our WACC. This combined reduces our TP to Rs2,601(from Rs2,981).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals
Rock solid
BHEL reported 3Q11 earnings in line with our estimates. We believe the inherent
advantages should allow the company to maintain its dominant position in the
equipment industry, despite increasing competition. Buy maintained with a
revised TP of Rs2,601.
3Q11 earnings in line with estimates; on track to meet FY11 guidance
BHEL reported 3Q11 earnings in line with our estimates, with adjusted profit for the quarter
coming in at Rs13.4bn (up 26% yoy). The company reported an order backlog of Rs1.58trn
(up 18% yoy), implying 9M11 inflow of Rs365bn. We expect the FY11 inflow guidance of
Rs600bn to be comfortably met, with NTPC likely to award supercritical orders in 4Q11.
Financing a key factor in private orders, but BHEL has its share of customers
Based on our discussions with private IPPs, we believe cheaper Chinese financing is a key
reason for them to place orders with Chinese vendors. While most private IPPs are prepared
to consider Chinese vendors, two large IPPs indicated they were unwilling to do so, citing
issues related to quality and good post-installation support. The private sector accounted for
90% of BHELís power sector inflows in FY10 and at least 25-30% inflow to date.
We expect pricing to be benign in state orders; favourable for margins
Our discussions with industry players indicate that a price war is unlikely as the market has
only three to four players currently. This corroborates our view that BHEL would be the only
player likely to benefit from a price war. Its recent bid for two 2x660MW projects in Rajasthan
indicates its competitiveness against private players, while the turbine pricing for the bulk
tender indicates a benign pricing environment at Rs13m/MW.
Defensive pick in a volatile market. Maintain Buy
Power sector capex remains resilient despite the slowdown in other sectors. BHEL is the
only company in our coverage universe whose short-term growth outlook we would expect to
remain unaffected even if order inflows slowed. We forecast an earnings CAGR of 21% over
FY11-13. The stock trades at a PE of 16x FY12F. We build in higher risk-free rates, which
raises our WACC assumption. This reduces our target price to Rs2,601 (from Rs2,981).
Rock solid
BHEL reported 3Q11 earnings in line with our estimates. We believe its inherent
advantages should allow the company to maintain its dominant position in the equipment
industry, despite increasing competition. Buy maintained with a revised TP of Rs2,601.
3Q11 results in line with estimates
BHEL reported 3Q11 numbers in line with our estimates. Revenue for the quarter came in at
Rs90.2bn, up 25% yoy. The EBITDA margin rose 136bp yoy to 23% aided by lower staff costs
and lower raw material costs as a proportion of net sales. Other income declined to Rs1.5bn
(down 21% yoy). PBT was reported at Rs20.7bn (up 26% yoy), while adjusted profit came in at
Rs13.4bn (up 26% yoy), in line with our estimates.
Order book expands to Rs1.6trn; on track to meet FY11 inflow guidance
The company reported an order backlog of Rs1.58trn (up 18% yoy, up 3% qoq), implying order
inflow of Rs122bn for the quarter (down 22% yoy, down 10% qoq). The 9M11 inflow of Rs365bn
implies that the company now needs inflows of around Rs230bn in 4Q11 (vs Rs229bn in 4Q10) to
meet its guidance of Rs600bn for FY11. We note that the company is already the lowest bidder in
two large orders in Rajasthan that are likely to be awarded in 4Q11.
With these potential orders and the supercritical orders that NTPC is likely to award during 4Q11,
we thus believe BHEL will comfortably meet its inflow guidance. The order inflow is likely to
remain strong in FY12: management said at the 3Q11 conference call that it expected higher
inflows in FY12 than FY11.
Decline in raw material costs led to margin improvement
Raw material costs declined on a yoy basis to 53.3% of net sales (down 122bp yoy), resulting in
the margin rising to 23% for 3Q11 (up 136bp yoy). However, other expenses rose sharply to
Rs7.9bn (up 59% yoy, up 26% qoq); this included a provision of Rs1bn on account of liquidated
damages. Overall for 9MFY11, the margin expanded 211bp yoy to 19.4% due to a dip in both raw
material costs and staff costs as a proportion of net sales.
Continued growth in Power and Industry
The companyís power segment registered another strong quarter with revenues growing to
Rs73bn (up 28% yoy), while the industrial segment reported revenue of Rs21.4bn (up 19% yoy)
for the quarter. Overall, for 9MFY11, power segment grew to Rs196.5bn (up 25.1% yoy), while
Industry segment reported revenues of 54.8bn (up 16% yoy).
Competition heating up for private orders
The end-user industry for power equipment is split vertically into two categories: private IPPs and
state and central utilities. For private IPPs, the competition is between BHEL and Chinese
vendors. In state utilities, it is between BHEL and new joint ventures such as Larsen & ToubroMitsubishi and BGR Hitachi.
Our discussions with industry players suggest that decisions to use Chinese vendors are now
typically based more on equipment delivery timing than on price, which had been the appeal in the
past. The price differential between BHEL and Chinese vendors has narrowed, but there is still a
12-month gap in delivery in favour of the Chinese. However, with BHEL expanding its capacity
from the current 15GW to 20GW by 2012, it should be able to offer better lead times. Our
discussions also suggest the cheaper financing available to these private players from China
Eximbank is another key factor in their decision-making.
In the state and central utilities, price is key. However, a price war is unlikely as the market has
only three to four players currently. The recent Rajasthan orders indicate BHELís competitiveness
against private players, while the turbine pricing for the bulk tender indicates a benign pricing
environment. In FY10, the private sector accounted for 90% of power sector inflows for BHEL and
in current year this accounts for c25-30% of order inflows.
BHEL best placed among domestic players
There has been an increase in competition in the domestic sector with a number of new players
entering the market. However, we remain confident in BHELís inherent advantage. We believe it is
likely to remain the main player for public sector orders. As mentioned earlier, BHEL is likely to
compete with other domestic private players for public sector orders from whom we feel it unlikely
to face significant threat for two key reasons: 1) BHEL enjoys a cost advantage as it has fullydepreciated capacity and is undergoing brownfield expansion for new capacities; and 2) BHEL
has a strong vendor base which is unmatched by any private players. In addition, the companyís
strategy of establishing JVs with state utilities is likely to provide stability to inflows.
However, we feel that margins for the company may not remain at current levels in the event of
aggressive pricing by private players. In such a scenario, we believe BHEL can compete given its
inherent cost and market positioning advantages. However, we do not expect a significant dip in
margins over the next three years, as we believe its current order book consists of higher margins
projects. In addition, our discussions with industry players indicate that a price war is unlikely as
the market has only three to four players. In that case, the other main reason BHELís margins
might dip could be the absorption of super-critical technology.
Defensive pick in a volatile market: Buy maintained
Power sector capex has remained resilient despite the slowdown in other sectors. In addition,
NTPC has recently signed a power purchase agreement for an additional 67GW, which effectively
takes care of its expansion for the 12th and 13th Five Year Plan and augurs well for BHEL in the
medium term. BHEL is the only company in our coverage universe where the short-term growth
outlook growth remains unaffected even if order inflows slow down. We expect the company to hit
a CAGR of 21% over FY11-13F. The stock trades at 16xFY12F. We also build in higher risk free
rates which increases our WACC. This combined reduces our TP to Rs2,601(from Rs2,981).
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