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UBS Investment Research
Bharat Heavy Electricals Limited
Good defensive, attractive valuations
„ BHEL has outperformed the BSE Capital Goods Index 10% YTD
With very strong revenue visibility, we continue to maintain that BHEL is a very
good defensive stock in the Indian Capital Goods space. If we look at the stock’s
performance YTD, it outperformed the broader market (BSE Sensex) by 7%. In the
capital goods space as well, BHEL is one of the best performing stocks and has
outperformed the BSE Capital Goods Index 10% YTD.
„ Q3 FY11 results were ahead of consensus
In Q3 FY11, revenues grew 19% YoY to Rs85.8bn. EBITDA margins expanded
150bps YoY to 23.1% (consensus at 20%) and PAT was up 25% YoY to Rs13.4bn
(consensus at Rs12.9bn). At the end of Q3 FY11, the order book stands at
Rs1.58trn, up 10% versus the FY10 order book. Overall, Q3 results were ahead of
consensus estimates.
„ Valuations are attractive for BHEL
BHEL is currently trading very close to the lower end of its trading range (at <15x,
1-year forward earnings). We think that with significant expansion in
manufacturing capacity, BHEL may continue to benefit from operating leverage.
This, combined with strong corporate governance standards and reasonably
encouraging news flow, makes current valuations very attractive in our view.
„ Valuation: maintain Buy, PT of Rs2,950; top pick in capital goods space
We base our price target of Rs2,950 on our DCF valuation. Our key assumptions
are a WACC of 11.9%, a medium-term growth rate of 15%, and 5% long-term
growth. BHEL is our top pick in the capital goods space.
Attractive valuations
BHEL is currently trading at <15x 1-year forward earnings. We believe with
significant expansion in manufacturing capacity, it may continue to benefit from
operating leverage. This, combined with strong corporate governance standards
and reasonably encouraging news flow, makes current valuations appear very
attractive in our view.
Q3 results were ahead of consensus
In Q3 FY11, operating income grew 19% YoY to Rs85.8bn. EBITDA margins
expanded 150bps and recurring PAT was up 25% YoY to Rs13.4bn. The results
were ahead of consensus (PAT expectation of Rs12.9bn). At the end of Q3
FY11, the order book stands at Rs1.58trn, up 10% versus the FY10 order book.
We remain positive on the stock and maintain BHEL as 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
The key risks for BHEL remain execution, delivery, raw material costs, and
order inflows.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Bharat Heavy Electricals Limited
Good defensive, attractive valuations
„ BHEL has outperformed the BSE Capital Goods Index 10% YTD
With very strong revenue visibility, we continue to maintain that BHEL is a very
good defensive stock in the Indian Capital Goods space. If we look at the stock’s
performance YTD, it outperformed the broader market (BSE Sensex) by 7%. In the
capital goods space as well, BHEL is one of the best performing stocks and has
outperformed the BSE Capital Goods Index 10% YTD.
„ Q3 FY11 results were ahead of consensus
In Q3 FY11, revenues grew 19% YoY to Rs85.8bn. EBITDA margins expanded
150bps YoY to 23.1% (consensus at 20%) and PAT was up 25% YoY to Rs13.4bn
(consensus at Rs12.9bn). At the end of Q3 FY11, the order book stands at
Rs1.58trn, up 10% versus the FY10 order book. Overall, Q3 results were ahead of
consensus estimates.
„ Valuations are attractive for BHEL
BHEL is currently trading very close to the lower end of its trading range (at <15x,
1-year forward earnings). We think that with significant expansion in
manufacturing capacity, BHEL may continue to benefit from operating leverage.
This, combined with strong corporate governance standards and reasonably
encouraging news flow, makes current valuations very attractive in our view.
„ Valuation: maintain Buy, PT of Rs2,950; top pick in capital goods space
We base our price target of Rs2,950 on our DCF valuation. Our key assumptions
are a WACC of 11.9%, a medium-term growth rate of 15%, and 5% long-term
growth. BHEL is our top pick in the capital goods space.
Attractive valuations
BHEL is currently trading at <15x 1-year forward earnings. We believe with
significant expansion in manufacturing capacity, it may continue to benefit from
operating leverage. This, combined with strong corporate governance standards
and reasonably encouraging news flow, makes current valuations appear very
attractive in our view.
Q3 results were ahead of consensus
In Q3 FY11, operating income grew 19% YoY to Rs85.8bn. EBITDA margins
expanded 150bps and recurring PAT was up 25% YoY to Rs13.4bn. The results
were ahead of consensus (PAT expectation of Rs12.9bn). At the end of Q3
FY11, the order book stands at Rs1.58trn, up 10% versus the FY10 order book.
We remain positive on the stock and maintain BHEL as 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
The key risks for BHEL remain execution, delivery, raw material costs, and
order inflows.
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