bharat heavy electricals limited – a stock valuation

8/8/2019 Bharat Heavy Electricals Limited a stock valuation

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BHARAT HEAVY ELECTRICALS

LIMITED A STOCK VALUATION

PRESENTED BYARKAYAN BAGCHI

ANIRBAN CHAKRABORTY

TEAM INDIGENIUS

IIM-INDORE


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COMPANY

Largest supplier of power equipment in India

Caters to core sectors of the Indian Economy viz., Power

Generation & Transmission, Industry, Transportation, Renewable

Energy, etc.

Wide product portfolio consisting of boilers, gas turbines,

fabric filters, steam generators and switch gears, among others.


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POWER INDUSTRY - INDIA

Fifth largest in generation capacity around the world

Government reforms such as The Electricity Act and National Tariff Policy

will give the impetus to the Indian power sector.

Challenges hindering the entry of new players

- Huge initial investments

- Issues while acquiring land

- Unavailability of skilled work force

- Huge losses while transmitting and distributing power


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BHEL STOCK

Current Market Price: Rs. 2416.45

(as on 11th Nov,2010)

Shareholding Pattern (%)

Promoters 67.7, MF/Banks 15.7, FII,NRI,OCBs 14.8, Indian public 1.8


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RECENT PERFORMANCE HIGHLIGHTS


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ORDER BOOK


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FINANCIAL STATEMENTS

Balance Sheet for last 5 years

Income Statement for last 5 years

Cash Flow Statement for last 5 years


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ANALYSIS OF FINANCIAL STATEMENTS


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COMPETITION


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STOCK VALUATION : KEY INPUTS

A publicly traded firm potentially has an infinite life. The value is therefore thepresent value of cash flows forever.

Since we cannot estimate cash flows forever, we estimate cash flows for a growthperiod and then estimate a terminal value, to capture the value at the end of the

period.


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STOCK VALUATION METHODS

1. EARNINGSGROWTHMODEL

PRICE TO EARNINGS RATIO

As per previous year trends,

EPS = Rs. 109.50(Expected in 2011), P/E = 23(Expected in 2011),

Intrinsic value of single share = 109.5 * 23 = Rs. 2518.5

With P/E ratio close to industry average of 26, the stock looks a decent BUY.


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PRICE TO BOOK VALUE RATIO

As per previous year and industry trends,

Book Value = Rs. 400 (Expected in 2011), P/B = 6.5 (Expected in 2011),

Intrinsic value of single share = 400 * 6.5 = Rs. 2600

Amongst its peers BHEL is having lowest P/B ratio meaning the stock is little

undervalued, stock looks a good BUY.


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For BHEL the net sales are growing at an average of 15%-20% since last few years. Sofor the year FY2011 we can safely assume the sales will be around Rs. 40,000Cr.

Sales per share = Rs. 805 (Expected), P/S = 3.2 (Expected)

Intrinsic value of share would be = 805 * 3.2 = 2576

This Price to Sales ratio indicates that the stock is undervalued at this moment. So it

can be a good BUY at this market price.

PRICE TO SALES RATIO


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As per previous year trends,

We are predicting an increment in cash flow of 25% for the year FY2011.

Cash Flow per share = Rs. 140 (Expected)

P/CF ratio = 17.5 (Expected)

Intrinsic value of share would be = 140 * 17.5 = Rs. 2520

This ratio gives a measure of firms financial health. The ratio for BHEL is improvingYoY. So the stock looks a decent BUY from medium to long term point of view.

PRICE TO CASH FLOW RATIO


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2. DIVIDENDDISCOUNTMODEL

Dividend Growth Model for a constant growth stock gives the estimation of the

present value of the stock price.

P0 =Dividend / (r-g); r = Expected return on stock, g = Expected growth rate individends

For this stock the dividend return is more than 50% in FY2010YoY. If the company'sdividend growth rate exceeds the expected return rate, we cannot calculate a value -because you get a negative denominator in the formula. Stocks don't have a negative

value. In this case we are unable to predict byDDM model.


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With a very high revenue visibility and long term stability provided by immense powersector opportunity in the country, we believe that Discounted Cash Flowmethodology is apt for valuing BHEL.

3. DISCOUNTEDCASHFLOW

Using sensitivity analysis we find that for a terminal growth of 5%, we can expect theintrinsic value of the stock to be in the range of Rs 2400 - Rs. 3200 for a WACC rate of15% to 11%.


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INVESTMENT ARGUMENTS

Strong 2QFY2011 results

- Robust revenue growth of 26.2% yoy to Rs. 8,491cr for 2QFY2011

- Net sales rose by 430bp yoy to 64.3%.

- Employee costs were down by 90bp to 15.2% of sales

- Order inflows for the quarter surged by 68.3% yoy to Rs.13,500.

Power segment driving growth

- Strong revenue growth of 28.3% yoy to Rs. 6,965cr for 2QFY2011- Maintain a balanced order backlog

- Strategy of revenue portfolio spread across the power and industry division inthe ratio of 70:30


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Dominant player in the domestic power equipmentmarket

- Largest supplier of power equipment in India

- Wide product portfolio consisting of boilers, gas turbines, fabric filters,etc

- Only Indian player manufacturing large-size, gas-based power plant equipment

- Strong presence in the boiler turbine generator (BTG) category, which forms akey part of the power plant.

Order inflow improves- Order inflows during 2QFY2011 increased by 68.3% yoy to Rs. 13,500cr

- BHEL received orders from its JVs with various SEBs for the supply ofsupercritical BTG.

- NTPC-BHEL Power Projects Ltd (NBPPL) has committed Rs 200 crore by end of

March 31, 2011- Front runner to receive a significant share of a bulk tendering order for 11

660MW sets, worth Rs 250 billion for complete turnkey in FY11.

Strategic tie-ups to enhance competitive edge


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Increased competition

- Power equipment industry is undergoing structural changes post the increasingpreference for fuel-efficient and supercritical technologies.

- Indian companies have set up or have initiated the process of setting up localmanufacturing facilities in collaboration with leading international players.

Execution concerns

- Long delivery schedules ofBHEL.

- Chinese manufacturers on account of their large capacities and standardized productofferings pose threat.

- Under the XIth plan ~49% of total orders have been delayed

INVESTMENT APPREHENSIONS


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Medium term- Very strong with continued inflow of orders, streamlining of new capacities

that will aid volume growth, continued capacity addition in power sector

and expansion of transmission network.- Stock is trading much below its 52week high

- Recommend BUY/HOLD

Long term- Competition from companies such as L&T, JSW Energy which will start

their power equipment manufacturing operations.

- Not expected to increase its current market share in the long term.

- Recommend aNEUTRALoutlook.

FUTURE OUTLOOK OF STOCK


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THANK YOU!!!

bharat heavy electricals limited – a stock valuation

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