BHEL (BHEL IN, INR 214, Hold)
We met the BHEL management to understand and gather latest updates on the company. Below are key takeaways:
FY13E intake guidance at 12-14GW, banking on govt projects
BHEL reiterated its original order intake guidance of 12-14GW as against the dismal 2.8GW reported in FY12. As we understand, majority of BHEL’s order intake expectation is from Central and state projects (largely coal and nuclear). The company expects to rebid for RRUVNL (660 MWx2setsx2) project in the coming months. The rebidding is expected to be intensely competitive given limited pipeline.
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Hiring fresh headcount only to replace retiring employees
BHEL added 20,000 employees during the 11th Plan period, while net addition during the same period was at 7266 (net of retirement). Given the current cost pressures and competitive intensity, the company intends to only replace existing employees who would retire. This number is expected to be 2200 per annum throughout the 12th Plan period.
Outlook & valuation- Sticky concerns; maintain HOLD/SP
Against the management’s fresh intake guidance of 12-14GW, we have assumed an order intake of 7.5 GW, assuming the total expected ordering in the country to be 13GW. Even as managing the fixed cost base remains a critical factor for BHEL’s profitably, a sharp fall in revenue visibility could lead to an actual decline in revenues from FY14E-FY15E onwards. We also remained concerned on BHELs profitability for industrial business given limited business pipeline & sustained pricing pressure. Also, we do not foresee any material contribution from the non-thermal revenue base (power T&D, locomotives, oil & gas products, etc) over the next 2-3 years. The stock currently trades at a P/E of 8.6x its FY13E & FY14E earnings respectively. In the absence of any material price trigger & falling RoEs beyond FY14E owing to profitability concerns, we maintain HOLD/SP rating for BHEL with a TP of INR 202).
Regards,
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