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Bharat Heavy Electricals (BHEL)
Industrials
Reinitiate coverage with a SELL on potential earnings decline. We reinitiate
coverage on BHEL with a SELL due to (1) a likely lull in incremental inflows with sectoral
issues and large accumulated ordering (125 GW already placed for XII Plan), (2) strong
competition and (3) likely pressure on margins. Earnings may decline (EPS of Rs22) over
the next 2-3 years as revenues remain stagnant and fixed costs increase; contribution
margins decline would exacerbate the pressure.
Reinitiate coverage with a SELL rating and a target price of Rs230
We reinitiate our coverage on BHEL with a SELL rating and a target price of Rs230, based on 9X
FY2013E earnings. Our SELL rating is based on (1) a potential lull in incremental order wins on
near-term sectoral issues (coal allocations) and accumulated ordering, which more than meets
XIIth Plan requirements, (2) rising domestic competition with credible JV partners to put further
pressure on incremental order wins, and (3) potential for margin contraction as incremental orders
may be won at lower realizations with stiffer competition.
EPS may decline on stagnant sales and rising fixed costs, even with flat contribution margins
We expect BHEL’s earnings to decline over FY2012-14 from about Rs28 in FY2012E to Rs26.2 in
FY2013E and Rs22.9 in FY2014E. Revenues may remain stagnant over the next few years at about
Rs500 bn as inflows are likely to remain sedate. We build an average annual inflow of about 8 GW
over FY2013-15E (includes about 5 GW from bulk tenders). Margins are also likely to face pressure
due to negative operating leverage; we build relatively flat contribution margin. Stiff competition
in a limited demand environment would potentially drive down contribution margins, as well.
Flash results broadly in line with estimates; low inflows of Rs257 bn but were anticipated
BHEL reported broadly in line FY2012 gross revenues of Rs493 bn. This implies yoy growth of 13-
14% over FY2011 reported revenues and implies 4QFY12 revenues of Rs200 bn, up 7.6% yoy.
BHEL reported net PAT of Rs69 bn in FY2012, (in line), up 14% yoy. This implies 4QFY12 PAT of
Rs32 bn, up 14.6% yoy (versus PAT of Rs28 bn in 4QFY11).
Bulk tender reflects fairly aggressive bidding; over 125 GW of orders placed for XII Plan
NTPC recently completed its last tranche of bulk tender bidding (11X660 MW boiler) in which BGR
Energy was declared as the lowest bidder at an average realization of about Rs14 mn/MW. The
pricing appears more aggressive than previous bids won by Doosan for the 9X800 MW boiler bulk
tender (ordered in Sept-11 at an average realization of Rs17.5 mn/MW).
We also note that equipment orders for over 125 GW have been placed, out of which about 98
GW are under construction, limiting scope for near-term order revival.
Reinitiate coverage with a SELL rating and target price of Rs230
We reinitiate our coverage on BHEL with a SELL rating and a target price of Rs230, based on
10X FY2014E earnings of Rs22.9.
Our SELL rating is based on
` Potential lull in incremental inflows. This is because (1) several sectoral issues
(coal/fuel linkages) hamper ordering activity, (2) a large part of XIIth Plan ordering may
already be complete (over 100 GW of projects, for which BTG already placed and are
likely to be commissioned during the XII Plan), (3) upcoming domestic competition (L&T,
Bharat Forge-Alstom and Thermax) appears credible: JVs with global equipment players
and (4) industry (transportation, renewable, transmission) spares/R&M, and exports are
unlikely to counterbalance shortfall in power. Order inflows have already stagnated at
about 15 GW a year over the past 3-4 years. Even this would be difficult to maintain.
` Potential margin contraction. Incremental orders may be won at lower realizations
with increased competition (part of this has already been witnessed in a bulk tender,
which saw relatively aggressive bids).
` Changes to market dynamics reduce incumbent advantages. The changes include
(1) a shift to supercritical technology, (2) increasing share of the private sector in capacity
addition and (3) rising supply-side capacities.
Earnings may decline over 3-4 years on stagnant revenues and rising fixed costs
We believe BHEL’s net earnings may decline over the next 3-4 years as revenues are
expected to remain stagnant (on sedate order inflows) and potential margin contraction due
to rising fixed costs, even as contribution margins remain relatively flat.
Stagnant inflows to impact revenue growth; potential for cancellations in backlog
BHEL’s inflows are likely to remain under pressure going forward as most of XII Plan orders
may already have been placed (equipment order for 125 GW of projects already placed with
about 98 GW under construction). Besides, rising domestic competition would eat into
market share in a limited demand environment. We presently build order inflows of about 8
GW a year over the next 2-3 years (FY2013-15E) which includes about 5 GW of inflows from
the recent NTPC bulk tender.
Order inflow slowdown would materially squeeze BHEL’s revenue growth prospects in the
medium term. We believe revenues may remain flat at about Rs500 bn over FY2013-15E
despite assuming (1) reasonably optimistic success for BHEL in winning utility orders in the
remaining XIIth Plan activity and (2) improvement in execution days as order book matures.
We note that BHEL’s order inflows have remained flat over the past four years (FY2008-11)
at about 15 GW a year. The inflow is likely to have been even lower in FY2012 at 2-3 GW.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
http://www.kotaksecurities.com/pdf/indiadaily/indiadaily10042012.pdf
Bharat Heavy Electricals (BHEL)
Industrials
Reinitiate coverage with a SELL on potential earnings decline. We reinitiate
coverage on BHEL with a SELL due to (1) a likely lull in incremental inflows with sectoral
issues and large accumulated ordering (125 GW already placed for XII Plan), (2) strong
competition and (3) likely pressure on margins. Earnings may decline (EPS of Rs22) over
the next 2-3 years as revenues remain stagnant and fixed costs increase; contribution
margins decline would exacerbate the pressure.
Reinitiate coverage with a SELL rating and a target price of Rs230
We reinitiate our coverage on BHEL with a SELL rating and a target price of Rs230, based on 9X
FY2013E earnings. Our SELL rating is based on (1) a potential lull in incremental order wins on
near-term sectoral issues (coal allocations) and accumulated ordering, which more than meets
XIIth Plan requirements, (2) rising domestic competition with credible JV partners to put further
pressure on incremental order wins, and (3) potential for margin contraction as incremental orders
may be won at lower realizations with stiffer competition.
EPS may decline on stagnant sales and rising fixed costs, even with flat contribution margins
We expect BHEL’s earnings to decline over FY2012-14 from about Rs28 in FY2012E to Rs26.2 in
FY2013E and Rs22.9 in FY2014E. Revenues may remain stagnant over the next few years at about
Rs500 bn as inflows are likely to remain sedate. We build an average annual inflow of about 8 GW
over FY2013-15E (includes about 5 GW from bulk tenders). Margins are also likely to face pressure
due to negative operating leverage; we build relatively flat contribution margin. Stiff competition
in a limited demand environment would potentially drive down contribution margins, as well.
Flash results broadly in line with estimates; low inflows of Rs257 bn but were anticipated
BHEL reported broadly in line FY2012 gross revenues of Rs493 bn. This implies yoy growth of 13-
14% over FY2011 reported revenues and implies 4QFY12 revenues of Rs200 bn, up 7.6% yoy.
BHEL reported net PAT of Rs69 bn in FY2012, (in line), up 14% yoy. This implies 4QFY12 PAT of
Rs32 bn, up 14.6% yoy (versus PAT of Rs28 bn in 4QFY11).
Bulk tender reflects fairly aggressive bidding; over 125 GW of orders placed for XII Plan
NTPC recently completed its last tranche of bulk tender bidding (11X660 MW boiler) in which BGR
Energy was declared as the lowest bidder at an average realization of about Rs14 mn/MW. The
pricing appears more aggressive than previous bids won by Doosan for the 9X800 MW boiler bulk
tender (ordered in Sept-11 at an average realization of Rs17.5 mn/MW).
We also note that equipment orders for over 125 GW have been placed, out of which about 98
GW are under construction, limiting scope for near-term order revival.
Reinitiate coverage with a SELL rating and target price of Rs230
We reinitiate our coverage on BHEL with a SELL rating and a target price of Rs230, based on
10X FY2014E earnings of Rs22.9.
Our SELL rating is based on
` Potential lull in incremental inflows. This is because (1) several sectoral issues
(coal/fuel linkages) hamper ordering activity, (2) a large part of XIIth Plan ordering may
already be complete (over 100 GW of projects, for which BTG already placed and are
likely to be commissioned during the XII Plan), (3) upcoming domestic competition (L&T,
Bharat Forge-Alstom and Thermax) appears credible: JVs with global equipment players
and (4) industry (transportation, renewable, transmission) spares/R&M, and exports are
unlikely to counterbalance shortfall in power. Order inflows have already stagnated at
about 15 GW a year over the past 3-4 years. Even this would be difficult to maintain.
` Potential margin contraction. Incremental orders may be won at lower realizations
with increased competition (part of this has already been witnessed in a bulk tender,
which saw relatively aggressive bids).
` Changes to market dynamics reduce incumbent advantages. The changes include
(1) a shift to supercritical technology, (2) increasing share of the private sector in capacity
addition and (3) rising supply-side capacities.
Earnings may decline over 3-4 years on stagnant revenues and rising fixed costs
We believe BHEL’s net earnings may decline over the next 3-4 years as revenues are
expected to remain stagnant (on sedate order inflows) and potential margin contraction due
to rising fixed costs, even as contribution margins remain relatively flat.
Stagnant inflows to impact revenue growth; potential for cancellations in backlog
BHEL’s inflows are likely to remain under pressure going forward as most of XII Plan orders
may already have been placed (equipment order for 125 GW of projects already placed with
about 98 GW under construction). Besides, rising domestic competition would eat into
market share in a limited demand environment. We presently build order inflows of about 8
GW a year over the next 2-3 years (FY2013-15E) which includes about 5 GW of inflows from
the recent NTPC bulk tender.
Order inflow slowdown would materially squeeze BHEL’s revenue growth prospects in the
medium term. We believe revenues may remain flat at about Rs500 bn over FY2013-15E
despite assuming (1) reasonably optimistic success for BHEL in winning utility orders in the
remaining XIIth Plan activity and (2) improvement in execution days as order book matures.
We note that BHEL’s order inflows have remained flat over the past four years (FY2008-11)
at about 15 GW a year. The inflow is likely to have been even lower in FY2012 at 2-3 GW.
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