UBS: BHEL --Meeting with management—key takeaways

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UBS Investment Research
Bharat Heavy Electricals Limited
Meeting with management—key takeaways
􀂄 We met with BHEL management yesterday in Delhi
We met with Bharat Heavy Electrical Limited (BHEL) management to get an
update on the company. This was our first meeting with the company post Q3
FY11 results. We also discussed the outlook for the power generation equipment
manufacturing sector. We remain positive on the company after our meeting.

􀂄 BHEL maintains order inflow guidance for FY11
BHEL maintained order inflow guidance for FY11 at the Rs600bn level, which is
largely similar to FY10 new orders. This is positive after the recent negative
newsflow on delays in NTPC bulk tendering. As the company is confident of
achieving about Rs600bn of order inflows in FY11, even after excluding the NTPC
bulk tendering, we believe this could be a positive for the stock.
􀂄 Power versus industrial mix is unlikely to change in the short term
The power versus industrial mix is unlikely to change significantly in the short
term. The industrial segment contributes 20-25% of order inflows and revenue, and
management does not expect this to change in the next one to two years. We
believe this indicates the company’s confidence in its ability to win new orders in
the power segment. The company has also expressed confidence that FY12 order
inflow should also be good (comparable with FY11 new orders).
􀂄 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 and we reiterate our Buy
rating.


Meeting with BHEL: key takeaways
We met with BHEL management yesterday to get an update on the company.
This was our first meeting with the company post Q3 FY11 results.
The key takeaways from the meeting are as follows:
Order inflow
1. BHEL maintained order inflow guidance for FY11 at a level similar to FY10.
2. The company is confident of achieving about Rs600bn of order inflows in
FY11; this does not include the NTPC bulk tendering.
3. NTPC plans to order 11 super-critical sets of 660MW each in the first phase
of bulk tendering. BHEL expects these orders to be completed in Q1 FY12.
Power vs industrial mix
1. Management indicated that the power vs industrial order mix is unlikely to
change significantly in the short term.
2. Industrial orders contribute 20-25% of order inflows and revenue.
3. Management does not expect this to change significantly in the next one to
two years.
4. We believe this indicates the company’s confidence in its ability to win new
orders in the power segment.
Other key highlights
1. BHEL will continue its zero-debt policy, which could be considered
conservative. Management believes this policy provides much more stability in
difficult times.
2. The NTPC-BHEL JV is largely for EPC work. The venture could also pursue
Balance of Plant (BOP) opportunities.
3. BHEL thinks that domestic competition in the Boiler, Turbine and Generator
space could continue in the near future.
We remain positive on the stock. We maintain BHEL as our top pick in the
India capital goods space.


􀁑 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.
􀁑 Statement of Risk
We believe the key risks for BHEL remain execution, delivery, raw material
costs, and order inflows.