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Bharat Heavy Electricals (BHEL)
Overweight
BHEL.BO, BHEL IN
Concerns in the price; maintain OW
• BHEL has consistently underperformed the market over the past
two years, belying consensus expectations: Stock performance was
affected by: a) steep loss of market share of new orders to Chinese /
L&T; b) concerns about sustainability of margins in the long run, due to
higher import content for new technology supercritical projects; c)
potential execution issues given a shift in customer mix towards IPPs
that are grappling with fuel, clearances and funding (see our detailed
bottom-up analysis for this); and d) potential under-utilization of its
20GW capacity, given signs of domestic PPE overcapacity.
• BHEL trades at 14.7x FY12E P/E, 15% below the historical
average: It also trades significantly below mean EV/OB and P/B, and
almost on par with the Chinese equipment supplier group (SEC &
Dongfang) vs. a ~30% premium a year ago. In our view, at current
valuations, the de-rating factors are largely in the price; we
maintain OW. Within our universe of investment plays, most of which
are dealing with issues on fuel, regulations, clearances and balance
sheet, we think BHEL offers the best risk-return and revenue visibility,
with RoE at 30%, de-levered balance sheet with net cash of Rs119B and
free cash flow yield of ~4%.
• Market concerns about continued access to supercritical boiler
technology from its partner Alstom, given the latter’s new JV with
Shanghai Electric, seem to be already discounted: We see this only as
a long-term risk, and we think options to go solo or seek another partner
are open to BHEL after its agreement expires. With strong government
backing, BHEL could even challenge the JV if it violates an extant noncompete
clause. Any clarity from BHEL management would lift the
overhang, in our view.
• Our Mar-12 PT of Rs2,400 (down from our Sep-11 PT of Rs2,780) is
more conservative on long-term volumes and assumes a sustainable
EBIT margin of 15.5% (vs 18.7% currently). Continued competitive
pressures pose a risk to long-term margins and our PT.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Heavy Electricals (BHEL)
Overweight
BHEL.BO, BHEL IN
Concerns in the price; maintain OW
• BHEL has consistently underperformed the market over the past
two years, belying consensus expectations: Stock performance was
affected by: a) steep loss of market share of new orders to Chinese /
L&T; b) concerns about sustainability of margins in the long run, due to
higher import content for new technology supercritical projects; c)
potential execution issues given a shift in customer mix towards IPPs
that are grappling with fuel, clearances and funding (see our detailed
bottom-up analysis for this); and d) potential under-utilization of its
20GW capacity, given signs of domestic PPE overcapacity.
• BHEL trades at 14.7x FY12E P/E, 15% below the historical
average: It also trades significantly below mean EV/OB and P/B, and
almost on par with the Chinese equipment supplier group (SEC &
Dongfang) vs. a ~30% premium a year ago. In our view, at current
valuations, the de-rating factors are largely in the price; we
maintain OW. Within our universe of investment plays, most of which
are dealing with issues on fuel, regulations, clearances and balance
sheet, we think BHEL offers the best risk-return and revenue visibility,
with RoE at 30%, de-levered balance sheet with net cash of Rs119B and
free cash flow yield of ~4%.
• Market concerns about continued access to supercritical boiler
technology from its partner Alstom, given the latter’s new JV with
Shanghai Electric, seem to be already discounted: We see this only as
a long-term risk, and we think options to go solo or seek another partner
are open to BHEL after its agreement expires. With strong government
backing, BHEL could even challenge the JV if it violates an extant noncompete
clause. Any clarity from BHEL management would lift the
overhang, in our view.
• Our Mar-12 PT of Rs2,400 (down from our Sep-11 PT of Rs2,780) is
more conservative on long-term volumes and assumes a sustainable
EBIT margin of 15.5% (vs 18.7% currently). Continued competitive
pressures pose a risk to long-term margins and our PT.
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