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UBS Investment Research
Bharat Heavy Electricals Limited
Q3 FY11 results: we expect strong quarter
„ We expect Q3 FY11 results to be ahead of consensus
Bharat Heavy Electricals (BHEL) will report Q3 FY11 results on 21 January. We
forecast operating income of Rs91.82bn, up 27% YoY, and the EBITDA margin to
expand 220bp. We forecast PAT to grow 39% YoY to Rs15bn. We think the
results are likely to be ahead of consensus estimates. Overall, we expect EBITDA
and PAT to be 18% and 16% above consensus numbers, respectively.
„ Operating leverage is the key theme for FY11/12
In H1 FY11, BHEL’s EBITDA margin expanded 250bp and we expect this trend
to continue in H2 FY11. With significant expansion in manufacturing capacity,
BHEL might significantly benefit from operating leverage in FY11/12, in our
view. We believe this is a significant positive for the company. Please refer to our
29 October 2010 note, Strong 2QFY11 results.
„ We believe the recent newsflow is encouraging
According to media reports, BHEL has emerged as the lowest bidder for two
1,320MW projects of Rajasthan Rajya Vidyut Utpadan Nigam (Rajasthan’s state
generation company). We believe this is significant because: 1) it was on an
international competitive bidding (ICB) basis; and 2) it is a large order (Rs60-
70bn). Also according to media reports, BHEL is among the three bidders declared
qualified after the technical evaluation for the boiler order in the NTPC bulk tender
(for 11*660MW). Please refer to Boiler order: three bidders for bulk tender,
10 January 2011.
„ Valuation: maintain Buy rating, defensive stock at reasonable valuation
We base our price target of Rs2,950 on a DCF valuation. Our key assumptions are
WACC of 11.9%, a medium-term growth rate of 15%, and long-term growth of 5%.
BHEL will report Q3 FY11 results next week
We forecast BHEL’s Q3 FY11 operating income to grow 27% YoY to
Rs91.82bn and EBITDA margin to expand 220bp. We also forecast PAT to
grow 39% YoY to Rs15bn. We think the results are likely to be ahead of
consensus. We expect EBITDA and PAT to be above consensus estimates by
18% and 16%, respectively.
trend to continue in H2 FY11. We believe this will be a significant positive for
BHEL. We think operating leverage is the key theme for BHEL in FY11/12.
Lowest bid for RRVUNL projects, media reports
According to media reports, BHEL has emerged as the lowest bidder for two
1,320MW projects of Rajasthan Rajya Vidyut Utpadan Nigam (RRVUNL,
Rajasthan’s state generation company). We believe this is significant as: 1) the
bidding was on an international competitive bidding (ICB) basis; and 2) it is a
large order (Rs60-70bn).
Q According to the reports, RRVUNL is in the process of awarding two
projects (with a total project cost of Rs122bn) on an engineering,
procurement and construction (EPC) basis.
Q The projects are being set up at Chhabra and Suratgarh in Rajasthan
(generation capacity of 1,320 MW each).
Boilers in NTPC bulk tender: BHEL to compete
with L&T-MHI and BGR-Hitachi
According to media reports, NTPC has finalised the technically qualified bids
for the boiler part of the 11*660MW bulk tender. At this stage, BHEL and two
other consortiums (L&T-MHI and BGR Energy-Hitachi) are in the running and
have been asked to submit price bids by 20 January. We believe the competitive
intensity is lower than expected and this could help the pricing for equipment
manufacturers. We expect the orders to be awarded in FY11.
Overall, we remain positive on BHEL, which is our top pick in the India capital
goods space
Q Bharat Heavy Electricals Limited
Bharat Heavy Electricals (BHEL) focuses on the Indian power equipment
business. Its main customers are National Thermal Power Corporation (NTPC)
and state electricity boards that account for over 70% of revenue. BHEL also
services the power transmission, captive power plant, industrial equipment, and
the transport segments. It is 68%-owned by the Government of India.
Q Statement of Risk
We believe the key risks for BHEL remain execution, delivery, raw material
costs, and order inflows.
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