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Bharat Heavy Electricals
Entry pricing by Hitachi--not
losing sleep-over
Aggressive bid in STG bulk tender; To win 1.6GW order; Buy
NTPC 9x800MW bulk tender for turbine generators saw an entry pricing (L1 ASP
@ Rs10.1mn/MW) by BGR-Hitachi (BGRH), which was 8% below BHEL and 16%
below BofAMLe. BHEL shall still win ~Rs16bn (2% of FY12E inflows) / 2x800MW
STG order vs BofAMLe of 4 sets. Importantly, blended BTG ASP for BHEL in this
bulk tender is in-line at Rs26.5mn as boiler ASP in tender yesterday, read BHEL)
was ahead of our est. BGRH strategy is similar to L&T-Mitsubishi' 1st bid entry
price during Jun’08, after which it raised prices by >20% from next bid onwards.
Buy BHEL on visibility of 22% EPS CAGR over FY11-13E with a backlog at 3.4x
FY12E sales and improved competitiveness, trading at 10.4x FY13E. Stock overhang
(divestment) could cap upside near-term.
Strategic imperatives - fragmentation + 1% OB add
The key strategic observations from this bid are a) Lower profitability / higher losses
in the TG sector on complete fragmentation / low utilization ex-BHEL. The winners
of 1st bulk tender - BF-Alstom (5 sets) and JSW (2 sets), didn't win any sets in 2nd
bulk tender and BGRH won 5 sets and L&T-MHI won 2 sets and b) Increase in
competition on entry of BGRH in India and aggressive bidding by BGRH, L&T-MHI
and JSW-Toshiba. We think that these low prices are unsustainable as banks may
turn cautious to finance this loss-making sector. For BHEL his lower margin order
shall constitute just 1% of its backlog but for its competitors it a/c for 20%-100% of
backlog. With ~10GW of supercritical order in its bag (table 1). BHEL has already
reached its indigenisation threshold (better margins).
How good is Rs10.1mn / MW ASP; Back to Jun'08
ASP of BGRH was 8% below BHEL while L&T-MHI (L2) bid and JSW-Toshiba (L3)
were almost neck-and-neck with L1. This is as gap in order win was big - minimum
order was 2 sets and max order was 5, per terms of bulk tender. Level of margin
sacrifice by BGRH can be gauged by the fact that its bid was just 4% higher vs L&TMHI
bid for 2x800MW STG order for Krishnapatnam TPP of APGenco despite
appreciation in Yen by >50% vs INR during this period (since Jun’08).
Price objective basis & risk
Bharat Heavy (BHHEF)
Our Price Objective of Rs2500 is based on 15x FY13E earnings with PEG of 0.8x
(vs 1x) to factor-in slower future growth and increased competition, which is inline
to its current multiples, the 41pct discount to peak PE in the last cycle (94-97) and
the mid-range of PE bands. On FY12E, BHEL trades at 5% discount to the
market, despite BHEL's superior market position, forecast earnings growth (19pct
for BHEL vs. the market 21pct) 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
Entry pricing by Hitachi--not
losing sleep-over
Aggressive bid in STG bulk tender; To win 1.6GW order; Buy
NTPC 9x800MW bulk tender for turbine generators saw an entry pricing (L1 ASP
@ Rs10.1mn/MW) by BGR-Hitachi (BGRH), which was 8% below BHEL and 16%
below BofAMLe. BHEL shall still win ~Rs16bn (2% of FY12E inflows) / 2x800MW
STG order vs BofAMLe of 4 sets. Importantly, blended BTG ASP for BHEL in this
bulk tender is in-line at Rs26.5mn as boiler ASP in tender yesterday, read BHEL)
was ahead of our est. BGRH strategy is similar to L&T-Mitsubishi' 1st bid entry
price during Jun’08, after which it raised prices by >20% from next bid onwards.
Buy BHEL on visibility of 22% EPS CAGR over FY11-13E with a backlog at 3.4x
FY12E sales and improved competitiveness, trading at 10.4x FY13E. Stock overhang
(divestment) could cap upside near-term.
Strategic imperatives - fragmentation + 1% OB add
The key strategic observations from this bid are a) Lower profitability / higher losses
in the TG sector on complete fragmentation / low utilization ex-BHEL. The winners
of 1st bulk tender - BF-Alstom (5 sets) and JSW (2 sets), didn't win any sets in 2nd
bulk tender and BGRH won 5 sets and L&T-MHI won 2 sets and b) Increase in
competition on entry of BGRH in India and aggressive bidding by BGRH, L&T-MHI
and JSW-Toshiba. We think that these low prices are unsustainable as banks may
turn cautious to finance this loss-making sector. For BHEL his lower margin order
shall constitute just 1% of its backlog but for its competitors it a/c for 20%-100% of
backlog. With ~10GW of supercritical order in its bag (table 1). BHEL has already
reached its indigenisation threshold (better margins).
How good is Rs10.1mn / MW ASP; Back to Jun'08
ASP of BGRH was 8% below BHEL while L&T-MHI (L2) bid and JSW-Toshiba (L3)
were almost neck-and-neck with L1. This is as gap in order win was big - minimum
order was 2 sets and max order was 5, per terms of bulk tender. Level of margin
sacrifice by BGRH can be gauged by the fact that its bid was just 4% higher vs L&TMHI
bid for 2x800MW STG order for Krishnapatnam TPP of APGenco despite
appreciation in Yen by >50% vs INR during this period (since Jun’08).
Price objective basis & risk
Bharat Heavy (BHHEF)
Our Price Objective of Rs2500 is based on 15x FY13E earnings with PEG of 0.8x
(vs 1x) to factor-in slower future growth and increased competition, which is inline
to its current multiples, the 41pct discount to peak PE in the last cycle (94-97) and
the mid-range of PE bands. On FY12E, BHEL trades at 5% discount to the
market, despite BHEL's superior market position, forecast earnings growth (19pct
for BHEL vs. the market 21pct) 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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