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Bharat Heavy Electricals-Set to surprise in 2011
�� Where we are
BHEL, India's dominant producer of power and industrial machinery, accounts for
62% (92GW) of India’s installed power capacity of 148GW. It has established
capacity to deliver 15GW pa and is planning to reach 20GW pa by FY12. It has
fully established technology to produce coal-based power sets of up to 1GW and
advanced-class gas turbines. In 1HFY11, it recorded PAT +38% on strong
execution (sales +22%YoY) and higher margin, at +250bp. Order inflows +19%YoY
on large state and private IPP orders, drove backlog to Rs1.54tn (+22%YoY).
Where we are going
We believe BHEL’s product business case certainty for IPPs, success of its new
products (270MW, 600MW, 660MW), especially with private IPPs, and India's
power equipment purchase policy offer an opportunity for it to win large orders
that translate to strong order backlog in 2011. It has a potential pipeline of
17x800MW set orders from its captive JVs under negotiation, which could add
orders worth Rs500bn (US$11bn) in two years. Also, the firm has taken steps to
scale-up in its industry domain (non-utility BTG business) as a hedge to support
its long-term growth by a) upgrading power T&D portfolio in JV with Toshiba, b)
scaling up transport equipment portfolio by doubling diesel loco production, tying
up with Alstom / GE to set-up new locomotive factory & with Alstom for metro rail
products, and c) foraying into compressor production with technology from GE.
With large and profitable order wins in 2011, BHEL could surprise the street which
seems worried about the firm’s growth visibility post FY12E. BHEL remains one of
our top picks on 24% EPS CAGR over FY11-13E with backlog at 3.3x FY12E
sales, peaked costs and improved competitiveness. With investments in FY09-10
in new product development and super-critical technology absorption, BHEL has
created a platform for sustainable (24%) EPS growth over FY11-13E.
Commissioning of its expansion to 15GW (10GW) and the plan to reach 20GW by
FY12E not only support execution but unleash the next level of operating leverage.
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