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Bharat Heavy Electricals
Focus on profitable leadership in Power
Takeaways from meeting with BHEL CMD at our 15th Annual India Conf.
�� India’s #1 power equipment major: ~51% share till FY17E
�� BHEL maintained 51% market share in XII plan (FY13-17) total order placed.
�� Pvt. IPP contributed 91% to BHEL FY10 orders indicating its ‘business case
certainty’, quality, execution capability, service reliability and eng. excellence
�� Its 500MW sets set global benchmarks on operating availability, higher PLF
and lower planned maintenance and forced outages.
Strategy to sustain leadership in Power & emerging areas
1) Capacity Enhancement, 2) Accelerated Project Execution, 3) Product Cost
Competitiveness, 4) Diversification and 5) Engineering & Technology
Organic & Inorganic Growth: Capacity +50% in FY11 and +33% in FY12E to
20GW. Also BHEL 1) Acquired BHPV Vizag in 2008 to enhance its design to
erection capability of custom built process plant and 2) BHEL Electrical (JV with
KEL) for manufacturing of products for Railways and Renewable energy.
Bridging Skill Deficit: 1) ITIs in JV/PPP mode, 2) leveraging WRI Trichy to train
high pressure welders, 3) Retired specialists as consultants, re-employment.
Site Capability Enhanced: 1) empowerment of project managers, 2) additional
tools & plants like heavy cranes suitable for erection of sets up to 800MW, 3) Add
31 cranes in FY10 to reach 108 cranes in FY10 and to add 31 cranes in FY11
Making supply chain agile: 1) Vendor base (added 1148 vendors in FY10 & 500
in 9MFY11), 2) Advanced Manufacturing Action for long lead items, 3) Technology
from Sheffield Forgemasters UK for large size forgings (up to 1000MW), 4)
Reverse Auction, e-Procurement, 5) Long term Rate Contracts for Steel, Copper,
CRGO, Transformer Oil (~25% to total purchase), 6) outsourcing of low tech/ noncore
manufacturing and 7) Away Center Fabrication adopted by Trichy & Ranipet.
Material Cost reduction efforts drive margins YTD: 1) Vendor base expansion,
2) global sourcing - leveraging low cost china manufacturing for high value
forgings, 3) Indigenization – to form JV with SAIL for indigenization of critical steel
materials like CRGO and 4) Integrated operations improvement
Employee productivity to increase sharply over FY07-12: Turnover +167%,
Capacity +100% and Manpower +17%
Strategic diversification: Solar, Nuclear, Transportation, Transmission &
Distribution (T&D), Water and NBFC.
Focus on R&D: #2 spender in India; 20% of sales now from
�� a) 270/525/600MW sub-critical sets introduced to fight Chinese competition,
b) Advance Class Gas Turbines, c) 765 & 1200kV-development, d) IGCC, e)
Transport-IGBT tech. and f) 420kN / 320kN insulators for ±800 kV HVDC line.
�� Developing India's first 800MW coal fired Advanced Ultra Supercritical power
plant in JV with Indira Gandhi Centre for Atomic Research (IGCAR) & NTPC.
�� Supercritical BTG - Tech. from Alstom (Boiler), Siemens (TG) & MHI (Pumps)
Price objective basis & risk
Bharat Heavy (BHHEF)
Our Price Objective of Rs2960 is based on 18.5x 1-year forward earnings, which
is a discount to its current multiples to factor-in slower future growth, the 27pct
discount to peak PE in the last cycle (94-97) and the mid-range of PE bands. On
FY12E, BHEL trades at 10% premium to the market, it deserves premium given
BHEL's superior market position, forecast earnings growth (24pct for BHEL vs.
the market 24pct) and RoE (30pct vs. the market 19pct). Risks to our price
objective are Govt. encouragement to its competitors with continued zero %
import duty / assured orders, Chinese, Japanese and Korean competition, a
rebound in metal prices, higher-than-expected wage hikes and on-ground project
execution challenges.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals
Focus on profitable leadership in Power
Takeaways from meeting with BHEL CMD at our 15th Annual India Conf.
�� India’s #1 power equipment major: ~51% share till FY17E
�� BHEL maintained 51% market share in XII plan (FY13-17) total order placed.
�� Pvt. IPP contributed 91% to BHEL FY10 orders indicating its ‘business case
certainty’, quality, execution capability, service reliability and eng. excellence
�� Its 500MW sets set global benchmarks on operating availability, higher PLF
and lower planned maintenance and forced outages.
Strategy to sustain leadership in Power & emerging areas
1) Capacity Enhancement, 2) Accelerated Project Execution, 3) Product Cost
Competitiveness, 4) Diversification and 5) Engineering & Technology
Organic & Inorganic Growth: Capacity +50% in FY11 and +33% in FY12E to
20GW. Also BHEL 1) Acquired BHPV Vizag in 2008 to enhance its design to
erection capability of custom built process plant and 2) BHEL Electrical (JV with
KEL) for manufacturing of products for Railways and Renewable energy.
Bridging Skill Deficit: 1) ITIs in JV/PPP mode, 2) leveraging WRI Trichy to train
high pressure welders, 3) Retired specialists as consultants, re-employment.
Site Capability Enhanced: 1) empowerment of project managers, 2) additional
tools & plants like heavy cranes suitable for erection of sets up to 800MW, 3) Add
31 cranes in FY10 to reach 108 cranes in FY10 and to add 31 cranes in FY11
Making supply chain agile: 1) Vendor base (added 1148 vendors in FY10 & 500
in 9MFY11), 2) Advanced Manufacturing Action for long lead items, 3) Technology
from Sheffield Forgemasters UK for large size forgings (up to 1000MW), 4)
Reverse Auction, e-Procurement, 5) Long term Rate Contracts for Steel, Copper,
CRGO, Transformer Oil (~25% to total purchase), 6) outsourcing of low tech/ noncore
manufacturing and 7) Away Center Fabrication adopted by Trichy & Ranipet.
Material Cost reduction efforts drive margins YTD: 1) Vendor base expansion,
2) global sourcing - leveraging low cost china manufacturing for high value
forgings, 3) Indigenization – to form JV with SAIL for indigenization of critical steel
materials like CRGO and 4) Integrated operations improvement
Employee productivity to increase sharply over FY07-12: Turnover +167%,
Capacity +100% and Manpower +17%
Strategic diversification: Solar, Nuclear, Transportation, Transmission &
Distribution (T&D), Water and NBFC.
Focus on R&D: #2 spender in India; 20% of sales now from
�� a) 270/525/600MW sub-critical sets introduced to fight Chinese competition,
b) Advance Class Gas Turbines, c) 765 & 1200kV-development, d) IGCC, e)
Transport-IGBT tech. and f) 420kN / 320kN insulators for ±800 kV HVDC line.
�� Developing India's first 800MW coal fired Advanced Ultra Supercritical power
plant in JV with Indira Gandhi Centre for Atomic Research (IGCAR) & NTPC.
�� Supercritical BTG - Tech. from Alstom (Boiler), Siemens (TG) & MHI (Pumps)
Price objective basis & risk
Bharat Heavy (BHHEF)
Our Price Objective of Rs2960 is based on 18.5x 1-year forward earnings, which
is a discount to its current multiples to factor-in slower future growth, the 27pct
discount to peak PE in the last cycle (94-97) and the mid-range of PE bands. On
FY12E, BHEL trades at 10% premium to the market, it deserves premium given
BHEL's superior market position, forecast earnings growth (24pct for BHEL vs.
the market 24pct) and RoE (30pct vs. the market 19pct). Risks to our price
objective are Govt. encouragement to its competitors with continued zero %
import duty / assured orders, Chinese, Japanese and Korean competition, a
rebound in metal prices, higher-than-expected wage hikes and on-ground project
execution challenges.
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