BHEL-Insights from analysis of plant level disclosures ::JPMorgan

We compiled disclosures on 7 large plants of BHEL for FY13, which account
for 79% of FY13 revenue. Few highlights for large plants mentioned below, a
more detailed analysis and our preview for results due on 23rd May are in the
body of the report. We estimate FY13 OPM of 18.7%, down 196bps

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 Trichy (Boilers, Valves). BHEL’s largest plant, accounts for 30% revenue. In
FY13, revenue of Rs150bn (vs. BHEL gross of ~Rs500bn, up 1%) grew 3.4%
YoY despite electricity supply issues at the plant/ancillary suppliers in TN and
PBT margin of 21.3% was down just 58bps. In FY13 BHEL reported PBT
margin of 18.5% on gross sales, down 235bps.
 Haridwar (TG, Turbine modules). 13% of revenue; reported surprisingly high
20% topline growth in FY13. As per plant management ~14GW of turbine
modules and 15GW of turbo generators of different ratings were manufactured.
PBT margin though steeply lower than Trichy, went up 51bps to 14.2%.
 Hyderabad (60MW sets, pumps, Gas turbines etc.). ~13% of revenue,
Rs64.9bn, down 7.3% YoY. Flat revenue growth target for FY14 and hope to
receive Rs65bn orders this fiscal. PBT margin increased 58bps to 23.5%.
 Bhopal (Switchgear, Transformers, Rotating machines etc.). 9.5% of sales.
As per plant management, Bhopal missed FY13 revenue target by 21%, a
reflection of slow execution due to project level/financing issues faced by
customers. FY13 PBT margin was down 246bps to 14.5% - the outcome still
appears far better when compared to ABB, Siemens and CG in India.
 Non-plant erection and other services and spares: We conclude that income
under this head was flattish (~Rs80bn, ~16% of revenue) though PBT margin
may have fallen over 330bps to ~12.3%. Site clearance issues, delays resulting
in cost overruns may have been responsible.
Conclusion and investment thesis: In the B-TG plants of Trichy-Haridwar
FY13 order book is down 12-16%; our gross topline de-growth estimate of 4%
builds in expectation of superior execution post achievement of 20GW capacity
and higher indigenization claimed by both plants. Margin pressure in the B-TG
segment has been controlled really well in FY13 and was mainly concentrated in
erection services, electronic control equipment, and switchgear/transformers.
This is likely to change as topline de-grows (esp. for Haridwar in FY14), we
estimate 170bps EBITDA margin decline in FY14E. We maintain UW, degrowth
in P&L starting from topline is likely to sustain over FY14-15.