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India Equity Research Reports, IPO and Stock News
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Bharat Heavy Electricals — When going gets
tough, the tough get going; Beat consensus
Country Overview
Robust FY11 in a tough macro; Margin gains commendable
BHEL pleasantly surprised street with Rec. PAT Rs57bn +37%YoY (+3%
consensus) on 20%YoY growth in sales (target 11-16%) and 170bps fall in labour
costs. Backlog (Rs1.6tn/US$36bn) +14%YoY led by inflows of Rs605bn/US$13bn
(guidance Rs600bn) despite tough macro and rising competition. Reported PAT
was +40%YoY on Rs2.8bn of profit on change in a/c policy for warranty provision.
We up our FY12E EPS by 3% on better FY11A. BHEL is one of our top picks on
19% EPS CAGR over FY11-13E with a backlog at 3.4x FY12E sales and
improved competitiveness trading at 13x FY13E. Buy with PO of Rs2960, 36%
potential upside.
Inflows accelerate despite cloudy skies. Backlog & margin up
BHEL booked 40% of its FY11 inflows in 4Q to meet its order inflows guidance
despite slippage of Rs125bn (21% of inflows) to 1QFY12E. This validates our
thesis (read our report Bharat Heavy Electricals, 19 January 2011) of acceleration
in inflows during 4QFY11 (see Table 2 & 3) despite weak sentiments towards
capex, based on our on-ground research. This helped BHEL grow backlog
14%YoY despite market concerns of rising competition, weak state finances and
coal shortages impacting the same. In the 6th year of Chinese competition,
BHEL’s EBITDA margins (implied) expanded 315bps on 170bps and 130bps fall
in employee & material costs resp., which was commendable. Quality of earnings
was better with lower treasury income. Cash / debtor days were stable.
Look beyond P&L for more exciting times ahead; EVA +41%
With investments done in FY09-11 in new product development and Super-critical
technology absorption, we believe BHEL has created a platform for sustainable
EPS growth (19% over FY11-13E). Its FY11 R&D spend Rs10bn grew 21%YoY,
capex Rs17.7bn (+3%YoY), EVA was up 41% and value add / employees
+38%YoY. We estimate BHEL is on track to reach 20GW capacity by FY12E – it
has commissioned 82 out of 251 machines so far.
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 (19pct for BHEL vs.
the market 22pct) and RoE (29pct vs. the market 20pct). 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 — When going gets
tough, the tough get going; Beat consensus
Country Overview
Robust FY11 in a tough macro; Margin gains commendable
BHEL pleasantly surprised street with Rec. PAT Rs57bn +37%YoY (+3%
consensus) on 20%YoY growth in sales (target 11-16%) and 170bps fall in labour
costs. Backlog (Rs1.6tn/US$36bn) +14%YoY led by inflows of Rs605bn/US$13bn
(guidance Rs600bn) despite tough macro and rising competition. Reported PAT
was +40%YoY on Rs2.8bn of profit on change in a/c policy for warranty provision.
We up our FY12E EPS by 3% on better FY11A. BHEL is one of our top picks on
19% EPS CAGR over FY11-13E with a backlog at 3.4x FY12E sales and
improved competitiveness trading at 13x FY13E. Buy with PO of Rs2960, 36%
potential upside.
Inflows accelerate despite cloudy skies. Backlog & margin up
BHEL booked 40% of its FY11 inflows in 4Q to meet its order inflows guidance
despite slippage of Rs125bn (21% of inflows) to 1QFY12E. This validates our
thesis (read our report Bharat Heavy Electricals, 19 January 2011) of acceleration
in inflows during 4QFY11 (see Table 2 & 3) despite weak sentiments towards
capex, based on our on-ground research. This helped BHEL grow backlog
14%YoY despite market concerns of rising competition, weak state finances and
coal shortages impacting the same. In the 6th year of Chinese competition,
BHEL’s EBITDA margins (implied) expanded 315bps on 170bps and 130bps fall
in employee & material costs resp., which was commendable. Quality of earnings
was better with lower treasury income. Cash / debtor days were stable.
Look beyond P&L for more exciting times ahead; EVA +41%
With investments done in FY09-11 in new product development and Super-critical
technology absorption, we believe BHEL has created a platform for sustainable
EPS growth (19% over FY11-13E). Its FY11 R&D spend Rs10bn grew 21%YoY,
capex Rs17.7bn (+3%YoY), EVA was up 41% and value add / employees
+38%YoY. We estimate BHEL is on track to reach 20GW capacity by FY12E – it
has commissioned 82 out of 251 machines so far.
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 (19pct for BHEL vs.
the market 22pct) and RoE (29pct vs. the market 20pct). 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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