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BHEL's problems stem from a domestic fuel shortage, growing domestic competition and lack of
government policy support (import duty). Order awards have shrunk notably as developers await
reforms on several issues. From an order inflow perspective, the next two to three years could be
difficult for BHEL.
Weak orders expected due to growing fuel challenges
According to our analysis by project, capacity under construction (including hydro, nuclear, etc)
for commissioning during the XIIth plan currently totals 130GW, which should more than take
care of India’s power requirements. This, coupled with a domestic coal shortage, as detailed in
our sector thesis, and a sharp rise in imported coal prices, has forced all leading developers to
rework their business models. Several developers (especially private) have backtracked on their
projects under consideration recently and await structural reforms on fuel and other issues.
Accordingly, we expect order awards of an average 15-20GW pa (best case) over the next 3
years versus an average 30-35GW over FY08-11.
Domestic competition could worsen on low order award pipeline
As per our analysis (see Table 4), domestic power equipment manufacturing capacity should
increase to 38-41GW by 2013-14 (excluding Cethar vessels) versus the current 20-24GW.
However, the order award pipeline will likely narrow to 15-20GW pa for the next two to three
years and pick up only in FY15. In the interim, new players are likely to become aggressive in
acquiring fresh orders, which is a risk to BHEL’s future order inflow/revenue growth and historical
high EBITDA margin of 19% (see Tables 2 and 6).
Lack of policy support is negative for Indian equipment manufacturers
The planning commission recommended that an import duty be levied on equipment ordered from
overseas manufacturers beginning 4QFY10. However, private developers lobbied hard against
such a move given the cost/timeline advantage that Chinese players apparently have had versus
BHEL. Several private developers have taken full advantage of the delay in passing the
recommendation by giving bulk orders to Chinese companies. We believe this key policy gap has
hurt the prospects of most domestic manufacturers in India, including BHEL. We expect domestic
equipment players’ fortunes will continue to be weak until the import duty is implemented. We
resume coverage of BHEL with a Hold rating and Rs310 TP.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BHEL's problems stem from a domestic fuel shortage, growing domestic competition and lack of
government policy support (import duty). Order awards have shrunk notably as developers await
reforms on several issues. From an order inflow perspective, the next two to three years could be
difficult for BHEL.
Weak orders expected due to growing fuel challenges
According to our analysis by project, capacity under construction (including hydro, nuclear, etc)
for commissioning during the XIIth plan currently totals 130GW, which should more than take
care of India’s power requirements. This, coupled with a domestic coal shortage, as detailed in
our sector thesis, and a sharp rise in imported coal prices, has forced all leading developers to
rework their business models. Several developers (especially private) have backtracked on their
projects under consideration recently and await structural reforms on fuel and other issues.
Accordingly, we expect order awards of an average 15-20GW pa (best case) over the next 3
years versus an average 30-35GW over FY08-11.
Domestic competition could worsen on low order award pipeline
As per our analysis (see Table 4), domestic power equipment manufacturing capacity should
increase to 38-41GW by 2013-14 (excluding Cethar vessels) versus the current 20-24GW.
However, the order award pipeline will likely narrow to 15-20GW pa for the next two to three
years and pick up only in FY15. In the interim, new players are likely to become aggressive in
acquiring fresh orders, which is a risk to BHEL’s future order inflow/revenue growth and historical
high EBITDA margin of 19% (see Tables 2 and 6).
Lack of policy support is negative for Indian equipment manufacturers
The planning commission recommended that an import duty be levied on equipment ordered from
overseas manufacturers beginning 4QFY10. However, private developers lobbied hard against
such a move given the cost/timeline advantage that Chinese players apparently have had versus
BHEL. Several private developers have taken full advantage of the delay in passing the
recommendation by giving bulk orders to Chinese companies. We believe this key policy gap has
hurt the prospects of most domestic manufacturers in India, including BHEL. We expect domestic
equipment players’ fortunes will continue to be weak until the import duty is implemented. We
resume coverage of BHEL with a Hold rating and Rs310 TP.
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