BHARAT HEAVY ELECTRICALS Good show:: Edelweiss

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Bharat Heavy Electricals (BHEL) surprised positively on both revenue and
bottom line fronts in Q2FY11 on back of strong execution. Revenue was 7%
higher than our estimate and PAT was 11% above estimate. New orders
grew sharply by 73% Y-o-Y to INR 145 bn, which for H1FY11 was a growth
of 19% Y-o-Y to INR 253 bn, implying an order book growth of 20% Y-o-Y
to INR 1,540 bn (3.6X FY11 sales).
􀂄 Healthy execution and lower tax boost bottom line
Led by a strong 29% Y-o-Y growth in the power segment, which contributes
80% to total revenues, BHEL’s total revenues grew a strong 25% Y-o-Y. For
H1FY11, the company reported 21% Y-o-Y revenue growth, with the power
segment growth at a firm 24% Y-o-Y. We expect BHEL to post 26% Y-o-Y
growth in H2FY11 revenues, given its execution timelines. PAT for the quarter
grew 33% led by both improved margins and lower tax rate on account of
weighted average deduction for R&D spend during the quarter.
􀂄 Fresh orders rise 60% Y-o-Y; upsides to FY11 order inflow guidance
BHEL surprised us with a strong order inflow growth of 60% Y-o-Y to INR 135
bn, which, for H1FY11 grew at 15% Y-o-Y to INR 243 bn. The power sector
contributed major portion of new orders at 82% to INR 110 bn, representing
2,821 MW. During the current fiscal YTD, BHEL has bagged total orders worth
INR 313 bn, which could leave upsides to the management guidance of INR 550
bn for FY11.
􀂄 Update on power and other JVs
While BHEL could report two EPC orders from its various SEB JVs in the current
year, the company is in active talks with SEBs in Gujarat, Andhra, West Bengal,
and Punjab for power plant JVs. It has submitted bids for a diesel locomotive plant
for railways in consortium with GE and is also eyeing the propulsion systems
business for 7000 HP locomotives in tie up with Alstom Transport, France.
􀂄 Outlook and valuations: Positive; maintain ‘BUY’
Despite a strong negative sentiment prevailing in the domestic market for BHEL,
given mega BTG awards by Reliance and Lanco to Chinese players and import
duty deferment, we remain positive on the stock, given strong revenue visibility,
strong ordering pipeline over the next few quarters and expect it to beat the
FY11 order intake guidance. The stock currently trades at PE of 22x and 17x on
FY11E and FY12E earnings, respectively. We maintain our ‘BUY/Sector
Outperformer’ recommendation.