Bharat Heavy Electricals
Growth prospects remain strong
Current order book of Rs 78000 crore and capacity expansion by 150% over the next two years, ensures strong visibility to the earnings growth.
| Buy | Bharat Heavy Electricals |
| BSE Code | 500103 |
| NSE Code | BHEL |
| Bloomberg | BHEL@IN |
| Reuter | BHEL.BO |
| 52-week High/Low | Rs 2925 / 1301 |
| Current Price | Rs 2165 (as on 25th January 2008) |
Bharat Heavy Electricals (BHEL) is the largest engineering and manufacturing enterprise in India in the energy-related/
Aggressive Xlth Plan target at 78 GW to benefit immensely
The government has plans to add over 78 GW of power capacity during the Xlth five year plan (April 2007-March 2012). Out of this, while 50 GW is in various stages of implementation, the government wants to put the remaining 28 GW on order as soon as possible. We expect equipment orders on large of this being placed by end of 2008. This means a generation equipment opportunity of around US$ 16-18 bn. India’s generation capacity additions are set to move from a 5GW/year over the last 5 years to a 14GW/year over the next 5 years. Further, the annual
opportunity size could grow larger than this after FY12E, as India not only builds power plants for plugging the current deficit but also tries to keep pace with economic growth.
Apart from this, Rs 145 bn are expected to be spent on renovation and modernisation of old power plants over the next five years. BHEL is a dominant player in this space also and expects to gain a major share in this opportunity:
In order to meet the demand ahead, the company has adopted a three-pronged focus. First the company is investing on raising its capacity to manufacture power plant equipment equivalent to 10000 MW per annum from present 6000 MW per annum in the first phase and then to 15000 MW by Dec. 2009. Second, it is pursuing introduction of new technologies, viz. 800 MW thermal sets, 250 MW Hydro sets and 256 MW Advanced Class Gas Turbines as these are expected to give it the future edge in the market place. BHEL has also taken necessary steps to gear up to offer 300 MW/350 MW sets wherever required. Third, in order to enhance its competitive edge several integrated operations improvement strategies like Design-to-cost, Purchase and Supply management, Lean manufacture, organizing for services business, etc. are going to be pursued with vigour.
High order book of Rs 78000 crore gives solid visibility
The company has an outstanding order book position of about Rs 78000 crore at the end of December 2007 quarter. This order book is 4.5 times its FY 2007 sales. Order book is expected to touch Rs 100000 in the next few months.
Financials show steady all round growth
For the quarter ended December 2007, the company registered net sales growth of 14% to Rs 4964.2 crore. PAT was up 16% to Rs 771.90 crore.
For the nine months ended December 2007, the company registered net sales growth of 20% to Rs 13537.8 crore. PAT was up 38% to Rs 1748.50 crore.
Being an engineering company, quarterly performances do not indicate the expected annual performance.
Other high margin opportunities
Apart from new generation capacities, India also plans short-term solutions to reduce shortages like renovation & maintenance (R&M) and life extension (LE) of old plants. We expect BHEL to be the largest beneficiary of this capex, as it is the Original Equipment Manufacturer (OEM) for 90% of the old plants to be upgraded under the R&M/LE projects. BHEL has done significant base work to ramp-up this business. Being a high margin business, this business could aid BHEL’s overall margins also.
Valuation
For FY 2008, we expect the company to register sales and net profit of Rs 20707.84 crore and Rs 3240.85 crore respectively. Adjusted EPS works out to Rs 62.6. This EPS is expected to rise by 29% (over 2008 projected EPS of Rs 62.6) to Rs 81 in FY 2009. The share price trades at Rs 2165. While the P/E on FY 2008 EPS works out to 34.6, it falls to 26.7 on FY 2009 EPS.
| | 0403(12) | 0503(12) | 0603 (12) | 0703 (12) | 0803 (12P) | 0903 (12P) |
| Sales | 8771.50 | 10533.40 | 13289.20 | 17237.53 | 20707.84 | 26920.19 |
| OPM (%) | 12.3 | 13.4 | 17.6 | 19.1 | 18.8 | 19.0 |
| OP | 1075.40 | 1413.70 | 2338.20 | 3290.90 | 3884.82 | 5125.60 |
| Other Income | 424.60 | 486.20 | 530.80 | 761.47 | 1076.36 | 1345.45 |
| PBDIT | 1500.00 | 1899.90 | 2869.00 | 4052.37 | 4961.18 | 6471.05 |
| Interest | 57.40 | 81.40 | 58.70 | 43.33 | 35.37 | 29.00 |
| PBDT | 1442.60 | 1818.50 | 2810.30 | 4009.04 | 4925.81 | 6442.05 |
| Depreciation | 198.00 | 218.90 | 245.90 | 272.97 | 300.69 | 345.79 |
| PBT before DRE | 1244.60 | 1599.60 | 2564.40 | 3736.07 | 4625.13 | 6096.27 |
| DRE written off | 229.80 | 18.00 | 0.00 | 0.00 | -267.50 | 0.00 |
| PBT | 1014.80 | 1581.60 | 2564.40 | 3736.07 | 4892.63 | 6096.27 |
| Tax | 356.60 | 628.20 | 885.20 | 1307.07 | 1651.78 | 2133.69 |
| PAT | 658.20 | 953.40 | 1679.20 | 2429.00 | 3240.85 | 3962.57 |
| EPS (Rs)* | 33.0 | 39.4 | 68.6 | 49.6 | 62.6 | 81.0 |
| * On current equity of Rs 244.8 crore. | ||||||
| Bharat Heavy Electricals: Results |
| | 0712 (3) | 0612 (3) | Var. (%) | 0712 (6) | 0612 (6) | Var. (%) | 0703 (12) | 0603 (12) | Var. (%) |
| Sales | 4964.2 | 4339.7 | 14 | 13537.8 | 11262.5 | 20 | 17237.53 | 13228.2 | 30 |
| OPM (%) | 20.1 | 21.4 | | 14.8 | 15.1 | | 19.1 | 17.7 | |
| OP | 997.60 | 929.20 | 7 | 2003.40 | 1703.70 | 18 | 3290.90 | 2338.20 | 41 |
| Other income | 264.90 | 185.50 | 43 | 704.60 | 475.50 | 48 | 761.47 | 530.80 | 43 |
| PBIDT | 1262.50 | 1114.70 | 13 | 2708.00 | 2179.20 | 24 | 4052.37 | 2869.00 | 41 |
| Interest | 9.80 | 12.00 | -18 | 31.20 | 38.70 | -19 | 43.33 | 58.70 | -26 |
| PBDT | 1252.70 | 1102.70 | 14 | 2676.80 | 2140.50 | 25 | 4009.04 | 2810.30 | 43 |
| Depreciation | 76.20 | 66.20 | 15 | 214.50 | 196.70 | 9 | 272.97 | 245.90 | 11 |
| PBT | 1176.50 | 1036.50 | 14 | 2462.30 | 1943.80 | 27 | 3736.07 | 2564.40 | 46 |
| EO | 0.00 | 0.00 | -- | -267.50 | 0.00 | 100 | 0.00 | 0.00 | -- |
| PBT after EO | 1176.50 | 1036.50 | 14 | 2729.80 | 1943.80 | 40 | 3736.07 | 2564.40 | 46 |
| Tax | 404.60 | 368.80 | 10 | 981.30 | 679.50 | 44 | 1307.07 | 885.20 | 48 |
| PAT | 771.90 | 667.70 | 16 | 1748.50 | 1264.30 | 38 | 2429.00 | 1679.20 | 45 |
| PPA | 0.00 | 0.00 | -- | 0.00 | 0.00 | -- | 14.30 | 0.00 | 100 |
| Net Profit | 771.90 | 667.70 | 16 | 1748.50 | 1264.30 | 38 | 2414.70 | 1679.20 | 44 |
| EPS (Rs)* | # | # | | # | # | | 49.6 | 34.3 | |
| * On current equity of Rs 244.8 crore. | |||||||||
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