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BHEL
Better execution and stable margins to drive net profit growth in
2Q, while orders inflow to remain muted
Long-term outlook remains weak, as order inflows stagnate and
margins decline, resulting in negative EPS growth in FY13-14e
Remain Underweight (V) with target price of INR318 as a result of
stock split
2Q preview – better relative to 1Q
We expect BHEL to report net profit growth of
15% y-o-y to INR13.0bn driven by:
15% growth in revenue backed by its order
book of cINR1.6 trillion
Marginal improvement in EBITDA margins
by 45bp to 18%
Importantly we expect BHEL’s order inflow to
improve in this quarter after a significant decline
in 1Q to INR150bn, up 11% y-o-y aided by yet to
be finalised NTPC bulk order for 4x800MW
boilers (cINR51bn as per our calculation).
Long-term outlook is weak
We have a negative view on the stock as we expect a
reversal of order growth from a 26% CAGR over the
past 5 years to a -3.5% CAGR over the next 3 years,
due to a slowdown in new coal-fired power projects
resulting in industry-wide decline in order inflows.
In addition, we expect a 180bp margin decline
between FY11 and FY14, as the order mix shifts
towards imported supercritical equipment (c3% in
FY11 to 34% by FY14) resulting in negative EPS
growth (-1%) in FY13-14 vs a c29% CAGR over
the past 5 years.
Investor focus on order inflow outlook
Investors will focus on outlook for order inflow in
FY12, both for the power and industry segments.
The company is likely to lower its order flow
guidance to zero growth from 10%, given the coal
scenario in India. We have assumed a 10%
decline in order inflow to INR543bn for FY12.
Even this seems challenging as the company has
only managed to book orders worth INR175bn in
1H, 32% of our full-year forecast.
Investors will also be watching:
Projects expected to be commissioned in
FY12 (9.4GW commissioned in FY11) given
the capacity expansion to 20GW from 15GW
by end March 2012
Guidance on likely pricing for the FPO.
Retain Underweight (V) rating and TP
of INR318 (result of stock split)
We use an Economic Value Added approach to
value BHEL, assuming a WACC of 11% (using a
cost of debt of 9.0%, cost of equity of 11.5% and
beta of 0.9). We assume target sales growth of 6%,
operating return of 17% and target asset return of
1.75x, which yields a target price of INR318 (post
stock split), implying a potential return of -2.6%
(including dividend yield).
Our target price implies a PE of 11.6x on FY13e
EPS versus the current PE of 12.1x on FY12e EPS.
See Exhibit 9 for our BHEL valuation summary.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10 percentage
points above and below the hurdle rate for Indian
stocks of 11%. For BHEL, this translates into a
Neutral band of 1-21% above the current share price.
Our target price of INR318 implies a potential return
of -2.6%, which is below the Neutral band; thus, we
retain our Underweight (V) rating on the stock. We
add the volatility flag in recognition of the stock’s
historical volatility having increased.
Upside risks
Upside risks are: higher-than-expected order inflow
intake resulting in better-than-expected execution;
and higher-than-expected margins from a fasterthan-
expected shift to supercritical technology.
Exhibit 9: BHEL valuation summary
Key assumptions
Target sales growth 6.0%
Target OR margin 17.0%
Target asset turn 1.8
Tax rate 31%
WACC 11.0%
CAP 7.5
Value of current op (INRm)
Trend Sales 501,538
Trend CE 305,897
CE growth 3.4%
RoIC 29.8%
Trend OR 91,004
Value of current op 565,549
Value of future inv (INRm)
Incremental return 5,116
Incremental cost 1,156
EVA 2,348
Value of future inv 143,914
Total fair value, FY13e (INRm)
EV 709,462
EV – 12M fwd 787,669
Net debt (152,389)
Customer advances 165,875
Minorities 0
Investments/Associates (4,492)
Implied market cap 778,675
12M fwd target price (INR) 318
Source: HSBC estimates
see sector view and other company details (click link below):
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BHEL
Better execution and stable margins to drive net profit growth in
2Q, while orders inflow to remain muted
Long-term outlook remains weak, as order inflows stagnate and
margins decline, resulting in negative EPS growth in FY13-14e
Remain Underweight (V) with target price of INR318 as a result of
stock split
2Q preview – better relative to 1Q
We expect BHEL to report net profit growth of
15% y-o-y to INR13.0bn driven by:
15% growth in revenue backed by its order
book of cINR1.6 trillion
Marginal improvement in EBITDA margins
by 45bp to 18%
Importantly we expect BHEL’s order inflow to
improve in this quarter after a significant decline
in 1Q to INR150bn, up 11% y-o-y aided by yet to
be finalised NTPC bulk order for 4x800MW
boilers (cINR51bn as per our calculation).
Long-term outlook is weak
We have a negative view on the stock as we expect a
reversal of order growth from a 26% CAGR over the
past 5 years to a -3.5% CAGR over the next 3 years,
due to a slowdown in new coal-fired power projects
resulting in industry-wide decline in order inflows.
In addition, we expect a 180bp margin decline
between FY11 and FY14, as the order mix shifts
towards imported supercritical equipment (c3% in
FY11 to 34% by FY14) resulting in negative EPS
growth (-1%) in FY13-14 vs a c29% CAGR over
the past 5 years.
Investor focus on order inflow outlook
Investors will focus on outlook for order inflow in
FY12, both for the power and industry segments.
The company is likely to lower its order flow
guidance to zero growth from 10%, given the coal
scenario in India. We have assumed a 10%
decline in order inflow to INR543bn for FY12.
Even this seems challenging as the company has
only managed to book orders worth INR175bn in
1H, 32% of our full-year forecast.
Investors will also be watching:
Projects expected to be commissioned in
FY12 (9.4GW commissioned in FY11) given
the capacity expansion to 20GW from 15GW
by end March 2012
Guidance on likely pricing for the FPO.
Retain Underweight (V) rating and TP
of INR318 (result of stock split)
We use an Economic Value Added approach to
value BHEL, assuming a WACC of 11% (using a
cost of debt of 9.0%, cost of equity of 11.5% and
beta of 0.9). We assume target sales growth of 6%,
operating return of 17% and target asset return of
1.75x, which yields a target price of INR318 (post
stock split), implying a potential return of -2.6%
(including dividend yield).
Our target price implies a PE of 11.6x on FY13e
EPS versus the current PE of 12.1x on FY12e EPS.
See Exhibit 9 for our BHEL valuation summary.
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10 percentage
points above and below the hurdle rate for Indian
stocks of 11%. For BHEL, this translates into a
Neutral band of 1-21% above the current share price.
Our target price of INR318 implies a potential return
of -2.6%, which is below the Neutral band; thus, we
retain our Underweight (V) rating on the stock. We
add the volatility flag in recognition of the stock’s
historical volatility having increased.
Upside risks
Upside risks are: higher-than-expected order inflow
intake resulting in better-than-expected execution;
and higher-than-expected margins from a fasterthan-
expected shift to supercritical technology.
Exhibit 9: BHEL valuation summary
Key assumptions
Target sales growth 6.0%
Target OR margin 17.0%
Target asset turn 1.8
Tax rate 31%
WACC 11.0%
CAP 7.5
Value of current op (INRm)
Trend Sales 501,538
Trend CE 305,897
CE growth 3.4%
RoIC 29.8%
Trend OR 91,004
Value of current op 565,549
Value of future inv (INRm)
Incremental return 5,116
Incremental cost 1,156
EVA 2,348
Value of future inv 143,914
Total fair value, FY13e (INRm)
EV 709,462
EV – 12M fwd 787,669
Net debt (152,389)
Customer advances 165,875
Minorities 0
Investments/Associates (4,492)
Implied market cap 778,675
12M fwd target price (INR) 318
Source: HSBC estimates
see sector view and other company details (click link below):
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