bharat heavy electricals

8/2/2019 Bharat Heavy Electricals

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Underplayed by competition and supercritical issues, BHEL in our view is likely to

withstand international competition. Recent success in private sector orders for XII

plan and bagging of supercritical orders are likely to rest issues related to BHEL’s

competitiveness. Competition

is

likely

to

be

intense

with

marginal

loss

in

market

share

for BHEL; however, overall growth in power sector pie would keep the growth

momentum very strong for the company. Initiate coverage with an Accumulate rating

and 18 month target price of INR 2,680 per share.

Concern of competition – overplayed in our view

With the overall pie increasing, international players gained inroads in the Indian power

sector taking advantage of BHEL’s long lead time and initial cost difference. However, with

respect to Chinese equipments performance issues in Indian conditions, cost advantage

waning away, developers taking cognizance of quality of BHEL’s equipments and IPR related

issues, BHEL is likely to maintain its dominant position in the industry.

BHEL alleviating

execution

concerns

BHEL is aggressively expanding its capacity from the current base of 10 GW to 15 GW by

Q4FY10 and to 20 GW by Q4FY12. This, along with various JVs to debottleneck its supply

chain is expected to speed up execution for BHEL.

XII plan to add 100,000 MW – expect momentum to continue

XII plan aims to achieve nearly 100,000 MW of capacity addition of which ~32% has already

been ordered till date. Thermal power is expected to form ~75% of planned capacity addition.

Private sector is expected to take the lead with ~60% contribution in planned capacity

addition. BHEL maintained its dominant share at ~53% of total XII plan projects awarded till

date. Initial XII plan ordering provides comfort of total capacity addition (~100,000 MW) and

BHEL maintaining its dominant share.

Supercritical technology – the next big milestone

Supercritical power plants are expected to contribute a major chunk (~55%) of XII plan

capacity addition. BHEL has tied up with technology partners’ viz. Alstom and Siemens for

supercritical technology and is expected to completely absorb this technology after execution

of 8‐10 sets. It has also formed JV with state utilities to create captive stream of orders.

Initiate coverage with Accumulate rating, target price of Rs. 2,680 per share

We arrive at a target price of Rs. 2,680 per share based on our 3 stage DCF model

(assumptions overleaf ‐ exhibit 22) and initiate with Accumulate rating. The stock currently

trades at

~28x

and

~23x

our

FY10E

and

FY11E

EPS

estimates,

respectively.

Delay in capacity addition and ordering – risk to our call

Delay in XI plan capacity addition, XII plan ordering at a slower rate than expectation and

increasing competition (both domestic and international) pose biggest risk to our price target.

ACCUMULATE Rs.2,

Reuters: BHEL.BO; Bloomberg: BHEL IN Equity

18m price

target

Rs

2,680

Krishnakant Thakur

[email protected]

+91 22 4088 0382

Pawan Parakh

[email protected]

+91 22 4088 0380

Market Cap Rs1,108 bn (US$ 2

52 Week High/Low: Rs2,405

Share o/s:

Share o/s (fully diluted):

Avg daily trading vol (3m): 1,12

Avg daily

trading

val

(3m):

Rs2,452 mn

(US$

Quant vs. Consensus

TP EPS

Mean 2,172 110

High 2,820 131

Low 1,355 90.

Quant 2,680 99.

Buy(S) Hold(s) Se

Nos 17 17

Source: Bloomberg

Share Holding Pattern (%)

Jun09

Mar09

D

Promoters 67.7 67.7 6

FIIs 17.1 17.0 1

MFs/FIs/Banks 9.2 9.2

Others 6.1 6.1

0

5,000

10,000

15,000

20,000

25,000

A u g ‐ 0 7

O c t ‐ 0 7

D e c ‐ 0 7

F e b

‐ 0 8

A p r ‐ 0 8

J u n ‐ 0 8

A u g ‐ 0 8

O c t ‐ 0 8

D e c ‐ 0 8

F e b

‐ 0 9

A p r ‐ 0 9

J u n ‐ 0 9

SENSEX Index BHEL IN Equity

Bharat Heavy Electricals

INITIATING COVERAGESeptember 2, 2009

Source: Company, Quant Broking

India Equity Research I Engineering and Capital goods

Tough as old boots

Y/E Ma rch Sa le s

(Rs mn)

Change

(%)

EBITDA

(%)

PAT Rep.

(Rs mn)

PAT Adj.

(Rs mn )

EPS Adj.

(Rs)

Change

(%)

PE

(x)

RoE

(%)

RoCE

(%)

EV/EBITDA

(x)

EV/

FY07 176,143 29.0 20.5 24,147 24,142 49.3 44.1 45.9 30.0 39.9 29.1 6

FY08 197,269 12.0 19.0 28,593 28,603 58.4 18.5 38.7 29.2 34.9 27.4 5

FY09 271,440 37.6 16.3 31,152 31,152 63.6 8.9 35.6 26.4 34.4 22.7 3

FY10E 323,870 19.3 18.6 39,572 39,572 80.8 27.0 28.0 28.1 37.9 16.8 3

FY11E 410,254 26.7 18.4 48,477 48,477 99.0 22.5 22.9 28.4 39.0 13.0 2




September 2, 2009 2

Concern of competition – overplayed in our view

BHEL’s dominance unlikely to be threatened

On account of huge demand supply gap in the industry and BHEL, largest domestic equipm

manufacturer having too much on its plate, Chinese equipment manufacturers gaining market sh

was inevitable (exhibit 1). Capitalizing on superior delivery schedules and lower capital costs, Chin

equipment

manufacturers

bagged

quite

many

private

sector

orders.

Equipment

manufacturersShanghai Electric (SEC), SEPCO III, Dongfang, Doosan and others have bagged ~20,000 MW orde

the XI plan. Competition is further expected to heat up with setting up of domestic capacitie

various entities like L&T‐MHI, Alstom‐Bharat Forge, Ansaldo‐Gammon, REL‐SEC and others. Howe

in terms of quality, BHEL manufactured sets have consistently exceeded the national ave

efficiency parameters. In 2009 also, BHEL‐manufactured thermal sets achieved the highest

Operating Availability (OA) of 88.2 per cent, while the Plant Load Factor (PLF) at 80.1 per cent was

per cent higher than the national average, while all the new entrants have still to prove t

equipment quality in Indian conditions. With cost advantage for Chinese suppliers waning aw

quality of equipments to be proven for international manufacturers and BHEL addressing execu

concerns, we believe, BHEL’s dominance is unlikely to be threatened in the coming years.

Exhibit 1: Market share of main plant equipment suppliers in the XI plan (%)

BHEL ‐ 55%

Alstom ‐ 5%

Dongfang ‐ 7%

Doosan ‐ 5%

SEPCO III

‐3%

Shanghai

Electric ‐ 9%

Siemens ‐ 5%

Others ‐ 12%

Source: CEA, Quant Broking




September 2, 2009 3

Despite Chinese equipment manufacturers making headway in

private sector

On account of initial cost advantages (~15% economical than BHEL) and shorter delivery peri

International equipment manufacturers like Dongfang, Shanghai Electric, SEPCO III and Doo

Heavy industries made significant headway into fast growing Indian Power equipment sector.

below exhibit illustrates market share captured by various international players in a short spa

period (exhibit

3).

These

players

are

also

successful

in

getting

prestigious

UMPP

orders

and

h

made significant headway in private sector orders (exhibit 2).

Exhibit 2: Sector‐wise order composition for Chinese equipments suppliers (%)

15.4%

17.4%

67.3%

Central

State

Private


Exhibit 3: Market share of various Chinese/Korean equipment suppliers in XI plan (%)

0.0 2.0 4.0 6.0 8.0 10.0

Shanghai Electric

Dongfang

Doosan

SEPCO III

SCMEC





September 2, 2009 4

Cost advantage for Chinese equipments waning away

The cost advantage for Chinese equipments which started with ~15% as compared to BHEL

gradually come down. Infact, industry sources suggest that Chinese equipment manufacturers h

also increased prices up to ~20% over the past few months. This narrowing of pricing gap betw

Chinese and BHEL equipments has been possible on account of yuan appreciation vis‐à‐vis USD

BHEL becoming more competitive. Currently, international equipment suppliers (with m

manufacturing of

standardised

sets)

operate

at

much

lower

margins

as

compared

to

BHEL

(exhibi

In the likely event of mandatory requirement of domestic manufacturing set‐up (Refer note bel

the cost advantage for international suppliers is expected to diminish.

Further, BHEL with its domestic manufacturing presence clearly has an advantage over internati

competitors in terms of providing after sales operation & maintenance and spares services.

believe that domestic O&M services are important for customer servicing, client retention an

build a sustainable presence in the Indian market. Most of the international players do not h

domestic O&M set‐up and are likely to take some time to have a meaningful presence.With be

track record, customization of equipments depending on coal availability and provision for O

services, BHEL is likely to have an edge over its competitors.

Exhibit 4: Margins

of

Chinese/

Korean

equipment

suppliers

vis

‐à‐vis

BHEL

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Shanghai Electric Doosan Dongfang Harbin BHEL *

CY06 CY07 CY08

* Margins for BHEL for FY07, FY08 and FY09, respectively

Source: Bloomberg, Quant Broking

Ministry of Power’s insistence on domestic manufacturing

In a step towards indigenization of technology, moving towards standardization and subsequently reducing the lead time for

delivery,

Ministry

of

Power

(MoP)

is

trying

to

pave

way

for

mandatory

domestic

manufacturing,

which

currently

is

applicableonly to bulk power equipment contracts in the country. Hence domestic manufacturing requirement (or a phased

manufacturing program) is a pre‐requisite for upcoming bulk tender of supercritical equipment by NTPC. In anticipation to

this, some of the equipment suppliers (viz L&T ‐ MHI JV, Bharat Forge – Alstom and others) have initated their plans to set up

domestic manufacturing capacities.

The proposed plan for mandatory domestic manufacturing has been on the cards for some time and is also in Government’s

larger interest to have technology base in India. The policy directive, if applicable, is likely to have a significant impact on

Chinese equipment suppliers on primarily two counts. Firstly, it would take ~3‐4 years for setting up capacities and secondly it

would be increasingly difficult for newer entrants to compete (in terms of cost economics) with BHEL having formidable

infrastructure and depreciated capacities in the domestic market.




September 2, 2009 5

Superior PLF performance by BHEL equipments

Though power plants running on Chinese/Korean power equipments have limited performa

history in India, preliminary data suggests PLF of these power plants to be lower than nati

average, whereas on the other hand BHEL run power plants are running at an average PLF of ~

90%. We tried to compare performance of equipments manufactured by Chinese/Korean supp

(Yamuna nagar and Sagardighi) as compared to BHEL’s equipment (Raigarh plant). All the th

power

plants

have

been

commisioned

over

a

similar

period

(Mar –

Nov

2008).

Raigarh

plant

clocked a PLF of ~95% within six months of operation, significantly higher than other two po

plants (exhibit 5). Higher PLF of BHEL’s equipments as compared to its couterparts over the same

cycle of project gives a fair idea of superior quality of BHEL equipments vis‐à‐vis Chinese equipme

Exhibit 5: PLF of power plants installed by Chinese/ Korean players (Yamuna Nagar and Sagardighi) vis‐à‐vis BHE

(Raigarh TPP ‐ Jindal Power)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

J u l ‐ 0 8

A u g

‐ 0 8

S e p

‐ 0 8

O c t ‐ 0 8

N o v

‐ 0 8

D e c

‐ 0 8

J a n

‐ 0 9

F e b

‐ 0 9

M a r ‐ 0 9

A p r ‐ 0 9

M a y

‐ 0 9

J u n

‐ 0 9

Yamuna Nagar Sagardighi Jindal


BHEL increasing share in private sector

In the

latest

ordering

for

XIIth

plan

benefit,

BHEL

also

bagged

significant

orders

from

private

se

totaling 5,790 MW (exhibit 6) as against 2,040 MW in the entire XIth plan. BHEL’s announcemen

expand its capacity from 10,000 MW to 20,000 MW by FY12 is now likely to put private sector

comfortable postion to place orders with BHEL.

Exhibit 6: Orders bagged by BHEL from private sector in XII plan

Plant name Developer Capacity (MW)

Raigarh STPP PH‐II I U 1‐4 Ji nda l Power 2,400

Avantha Bhandar TPP Ava ntha Power 600

Bela TPP Idea l Energy 270

Adhunik Power

TPP Adhuni k

Power 270

Malibrahmani TPP Monet Power 1,050

Derang TPP JITPL 1,200

Total 5,790





September 2, 2009 6

BHEL alleviating execution concerns

Though BHEL’s quality has undoubtedly been among the best in the global markets, gap in the In

market existed on account of faster delivery of equipments. Chinese manufacturers on accoun

their large capacities and standardized product offerings were able to take advantage of the

created by long delivery schedules of BHEL. To address the loss in market share, BHEL is aggressi

expanding its capacity from the current base of 10 GW to 15 GW by Q4FY10 and to 20 GW

Q4FY12. For

this,

BHEL

is

likely

to

incur

capex

to

the

tune

of

Rs

42

bn

and

Rs

16

bn,

respectiv

These capacities shall progressively come on‐stream and would cater to both subcritical

supercritical requirements going ahead.

Under the XIth plan ~49% of total orders have been delayed on account of various reasons like de

related to BOP and EPC work, unavailability of fuel and water, state government issues

infrastructure related issues. These issues have caused delay in commissioning of projects by BHE

well as other international contractors (exhibit 7,8). It is note worthy that International suppliers

face execution challenges and on track projects (as a %) for BHEL and others are at par.

Exhibit 7: Status of projects executed by BHEL Exhibit 8: Status of projects executed by other contrac

Particulars (%)No del a y 35.7%

No reason gi ve n 15.1%

EPC de l a y 13.6%

BOP de l a y 13.2%

Land a cqus i i ton 4.6%

Poor geological condi ti ons 2.9%

Shortage of ma npowe r 2.6%

Environment clearance, coal l i nka ge 2.6%

Natural ca us e 2.4%

Traffic conges ti on 1.4%

Shortage of HP we l de rs 1.3%

Ga s una va i l a bi l i ty 1.2%

Protes ts 1.0%Others 2.6%

Total 100.0%

Particulars (%)

No del a y 35.8%

No reason gi ven 19.7%

EPC del a y 11.0%

BOP del ay 9.4%

State government i s s ue 6.9%

Ga s unavai l a bi l i ty 4.2%

Start up power s uppl y 3.5%

Extreme wea ther 3.5%

Coal l i nka ge 2.1%

Protes ts 2.1%

Others 1.8%

Total 100.0%

Source: CEA, Quant Broking Source: CEA, Quant Broking

To alleviate concerns of project delay arising due to BOP constraint, BHEL has entered into a JV w

NTPC, which is likely to take up business of BOP and other EPC assignments. Currently BHEL

identified four locations for putting up BoP facility (coal handling, ash handling and others). Th

has been awarded 2 projects from BHEL and NTPC. Further, BHEL is also establishing various o

JVs in order to debottleneck its supply chain.




September 2, 2009 7

XII plan to add 100,000 MW – expect momentum to

continue

With likely capacity addition of 60‐65 GW in the XI plan, Government plans to add 100,000 MW

capacity during XII five year plan (2013‐2017). Thermal capacity is expected to be the mainsta

total power capacity addition with contribution in the XII plan to be ~75%. This capacity additio

possible

with

high

private

sector

participation

and

large

super

critical

units.

We

expect

contribution from private sector could be as high as ~60% in the stipulated period. Supercri

technology is also expected to contribute with ~55% share of total capacity addition.

Exhibit 9: XIIth plan break up (by fuel type) Exhibit 10: XIIth plan break up (by technology)

75%

20%

5%

Thermal

Hydro

Nuclear

45%

55%

Sub critical

Super critical


Initial orders boost confidence for the plan period capacity addition

For likely benefit under the XII plan, total projects to the tune of 32,000 MW have already b

ordered. Out of that, thermal projects accounted for 30,940 MW while the remaining is Hy

Amongst thermal, private sector accounted for 59% of orders (exhibit 11,12).

Exhibit 11: XII plan ordering till date (by fuel type) Exhibit 12: XII plan ordering till date (by sector)

1,070 MW

30,940 MW

Hydro

Thermal

20.1%

20.5%59.3 %

Central

State

Private


BHEL continues to be a dominant player with ~53% market share in the projects for benefit du

XIIth plan (exhibit 13). SEPCO III, Shanghai Electric and Doosan Heavy Industries are the other str

players in the Indian market with a cumulative market share of 34% for the XII plan period

expected, the competition is likely to be intense as the remaining orders for XII plan will be relea

However, we expect BHEL to maintain its dominant position in the coming orders as well.




September 2, 2009 8

Exhibit 13: BHEL dominance continues in XII plan (%)

53%

4%2%

8%

18%

9%

6%

BHEL

BGR Energy

Technopram Russia

Doosan+Toshiba

SEPCO III

Shanghai Electric

SCMEC


Private sector orders expected to take lead in XII plan

Private sector orders contributed 30% of total thermal planned capacity addition in XI five year

(exhibit 14)

in

which

BHEL

had

an

11%

market

share.

Our

industry

interaction

suggests

that

pri

sector contribution in XII plan could be as high as 60% (as against 27% of total orders in XI plan). H

demand supply gap and favorable economics are the key drivers for private investments in

sector. Private players like Tata Power, Reliance Power, Adani Power, Torrent Power, Lanco In

GMR, GVK and others have already announced aggressive capacity expansion plan and these pla

envisage to add ~115,000 MW of capacity over the next 5‐7 years. (exhibit 4).

Exhibit 14: Private sector contribution to rise in the XII plan (MW)

Source: CEA, Quant Broking estimates

0

20,000

40,000

60,000

80,000

100,000

120,000

XI plan XII plan

Central/ St at e P ri vat e

to grow by ~2x




September 2, 2009 9

Exhibit 15: Private sector capacity expansion plans over next 5‐7 years (MW)

Private players Current capacity Expansion plans Likely capacity post expansion

Adani Power 300 9,600 9,900

CESC 975 6250 7,225

Essar Power 1,200 4,800 6,000

GMR Infra 823 4,140 4,963

GVK Power 901 1,240 2,141

Jaypee group 700 4,920 5,620

Jindal Power 1,000 2,400 3,400

JITPL 0 5,400 5,400

JSW Energy 800 11,200 12,000

Lanco Infra tech 511 7,875 8,386

Reliance Power 0 28,200 28,200

Sterli te 0 9,600 9,600

Tata Power 2,817 10,588 13,405

Torrent Power 1,648 7,500 9,148

Total 11,675 113,713 125,388

Source: Company, Quant Broking




September 2, 2009 10

Supercritical technology – the next big milestone

In order to reduce emissions and bring in higher efficiency, worldwide power equipment supp

have upgraded to supercritical technology. Supercritical (SC) and Ultra ‐supercritical (USC) po

plants operate at temperatures and pressures above the critical point which results in hig

efficiencies. With supercritical technology fairing better in terms of performance and environme

concerns, India is ready to move towards this advancement and its contribution going ahead is li

to be

much

higher

in

the

XII

plan.

We

believe,

XI

plan

was

just

a precursor

for

things

to

come

supercritical technology.

BHEL readying up for Supercritical days

Absorption of supercritical technology is the next biggest milestone that BHEL has to achieve. To

effect, BHEL has already tied up with Alstom for Boilers and Siemens for Turbine Generator sets

supercritical power plants. BHEL is expected to absorb the technology after successful executio

8‐10 supercritical orders. Initially, we believe, the margins on these orders are likely to be slig

lower on account of higher import content (sourcing from technology partner) and newer experie

for the company. However, post indigenization of technology, as import components decline

BHEL moves up the learning curve, margins are likely to improve for the company. BHEL has alre

made inroads

in

getting

orders

for

supercritical

units,

and

we

believe

it

is

a matter

of

time

be

BHEL becomes competitive in supercritical technology as it is in subcritical units.

BHEL has entered into JV with state utilities to develop supercritcal power plants of ~5,000

(exhibit 16). The same shall ensure BHEL of captive stream of orders for supercritical units to help

faster absorption of technology. The JV with Tamil Nadu Electricity Board (TNEB) for setting up 2x

MW thermal power plant in Tamil Nadu, KPCL for 3x660/800 MW and Mahagenco for 2x660 MW

step towards this direction. It is contemplating to have similar JVs with other state utilities.

xhibit 16: Supercritical orders received till date and JVs in this space

PLANT NAME Location Capacity (MW) AGENCY

BARH‐II BIHAR 1,320 NTPC

KRISHNAPTNAM AP 1,600 APGENCO

Total 2,920

Vs in the supercritical space by BHEL

V Partner Location Capacity (MW) Remarks

TNEB Tuticorin 2x800

JV for setting up first supercritical thermal power project in Ta

Nadu. Land for the project has already been identified.

Karnataka Power Corporation Limited (KPCL) Ra ic hur 3x66 0/800

JV to build, own and operate Supercritcal thermal plants

Karnataka

Maharashtra State Power Generation Company Limited (Mahagenco) Latur 2x660

MoU for setting up a JV to build, own and operate Supercri

thermal plants. The MoU contains an enabling provision tha

case of unavailability of coal linkage, but availability of gas,

parties may consider setting up a 1,500 MW gas based poplant, instead.

Total 4,900

ource: Company, Quant Broking





BHEL technology at par with others

BHEL has tied up with various technology partners for subcritical as well as supercritical technol

Most of the Global equipment suppliers also have technology tie ups with players like GE, Alst

Hitachi, Mitsubishi and Toshiba, and this technology agreement with global majors put BHEL at

with other international competitors. BHEL’s strength also lies in customization of these units as

Indian conditions which gives it an edge over other competitors.

xhibit 17: Various JVs / tie‐ups undertaken by BHEL

Partner Purpose

upercritical technology

Al s tom Technol ogy transfer agreement with Alstom for Supercritical Boilers

i emens Technol ogy tie ‐up for Steam Turbine an d Generators for Thermal power plant

GE Technol ogy tie ‐up for Ga s Turbine for Thermal power plant

Nuclear technology

NPCIL Technol ogy tie ‐ups being explored for 700/ 1,000/ 1,600 MW TG sets through this JV

GE ‐ Hi ta chi Cooperati on i n nuclear i s l a n d equipments (multiple‐unit advanced boiling water reactor (ABWR)) to be se t up by NPC

Heavy Engineering Corp JV for producing castings an d forgings for nuclear power plants, bas ed on upgrading HEC's plant.

heffield (Forge mas ters ) JV to manufacture nuclear forgings

Others

NTPC To jointly

execute

EPC

contracts;

manufacture

an d

s upply

BoP

equipments

Kerala Electrical an d Allied Engineering Company Limited ( KE L) Mo U s igned to form JV to manufacture products for Railways an d Industrial applications

GE Di es el electric locomotives an d manufacturing of propulsion system for these locomotives

BEL MoU s igned for setting up manufacturing facility for s ilicon wafers, s olar cells an d modules under a JV

ource: Company, Quant Broking





Financial Summary

Strong order book and XII plan ordering provides high revenue

visibility

BHEL’s current order backlog at Rs 1,240 bn stands at 4.4x of FY09 revenues. This order bac

coupled with the fact that 68% of ordering for XII plan is expected during FY10E‐FY13E, provides

revenue

visibility

for

the

company.

We

expect

BHEL

to

register

net

revenue

CAGR

of

26%

duFY10E‐12E and expect ordering to be more uniform across years for XII plan which is also likel

ensure healthy order intake for the coming years.

Exhibit 18: High order book visibility

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

FY06 FY07 FY08 FY09 FY10E FY11E

Closing order book (INR mn) Order book as % of sales

Source: Company, Quant Broking estimates

Margin expansion aided by soft commodity prices and lower wage

provisioning

We expect

margins

for

the

company

to

increase

by

220

bps

in

FY10E

primarily

driven

by

drop

in

material and employee cost. In the long term, we however expect the margins to trend lowe

account of intense competition and rise in input costs.

Exhibit 19: Revenue growth and margin profile over the years (%)

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

19.5

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY08 FY09 FY10E FY11E

Revenue growth (RHS) Direct cost growth (RHS) Staff cost growth (RHS)

PAT margin (LHS) EBITDA margin (LHS)

Source: Company, Quant Broking estimates





Other businesses provide growth potential

BHEL’s other business divisions like industrial, transportation, oil & gas, and transmission, tho

small as compared to the total power segment, also offers big opportunity going forward. Indus

segment currently contribute 15% to the total revenues while, spares and the O&M busi

contribute ~6% of the power segment revenues in FY09.

Large no of units are operating for over 30 years

BHEL commands 62% market share (FY09) of India’s total power capacity addition. The age profi

this capacity addition reveals that a large number of existing units are potential candidate

undertaking renovation, modernization and Life extension program (LEP). With most of the

provided by BHEL in India, R&M and LEP business is nearly assured for BHEL.

Exhibit 20: Age profile of total installations in India

Capacity range in MW > 15 years but < 20 years > 20 years but < 30 years > 30 years

< 200 8 27 108

200/210 38 74 10

250/300 ‐ ‐ ‐

500 9 6 ‐


Captive power, transportation and transmission to drive industrial growth

In the industrial segment we believe, captive power, transportation and transmission segment to

major contributor for growth. BHEL provides major capital equipment and systems like captive po

plants, industrial boiler and auxiliaries and gas turbines to a number of industries. Pick up in

industrial activity and heavy capex in Indian railways, Oil and gas sector and Power transmissio

distribution augurs well for BHEL.

Exhibit 21: Key projects bagged by BHEL in the industry segment

Project/ customer Product

Mundra UMPP

Bulk orders

for

40

transformers

(country's

highest

‐rating

Generator

transformers (930 MVA, 400 kV)

Mundra UMPP

Order for supply of Busducts a nd largest vertical motors for CWP

application

NTPC Barh Stage I I Ge ne ra tor transformers fo r 660 MW sets

Tirora project, Adani Power Ge ne ra tor transformers fo r 660 MW sets

PGCIL 26 nos. 400 kV shunt reactors

ONGC

Upgradation & Refurbishment of 12 onshore drilling rigs a nd

upgradation of existing advanced instrumentation system fo r 53

onshore rigs

HMEL‐Bhatinda, HPCL‐Mumabi, BRPL‐

Bongaigaon & MRPL‐ Ma nga lore Compre ss ors

SAIL, Rourkela Steel pl a nt Turbo blower package

PGCIL De vel opme nta l order fo r 765 KV transformer, reactor, CT, CVT & CB

Mazagaon Dock

Ltd Auxi l i a ry

control

systems

(defence

business)

BEL, Bangalore, Alps Environmental

Technologies a nd others Photo‐voltaic modules of various ratings

Source Company, Quant Broking





Premium valuation justified

We believe that premium valuation for BHEL is justified on account of very strong revenue visib

(4.4x FY09 revenues), large long term opportunity (68% of 100,000 MW ordering between FY

13E), strong balance sheet and healthy return ratios (RoE close to 30%). Historically, more t

revenue visibility, competition and issues related to supercritical technology have put the stock un

pressure and in our view though the competition is intense; BHEL’s quality, capacity expansion

success in

bagging

supercritical

orders

would

rest

these

issues.

Superior ROEs and growth profile as compared to international peers

As compared to its international peers, BHEL has superior growth profile and RoE (exhibit 22). In

power sector, we believe, is at the cusp of high growth period, and BHEL being a dominant play

likely to benefit immensly. We are of the view that BHEL would be able to withstand competit

and on account of limited successful track record and policies favoring domestic manufactu

presence, going is likely to be tougher for international players. In the event of quality of Chin

equipments questioned over a two‐three year period (current availability of one year of track rec

for these manufacturers), and on account of their below par performance with BHEL, BHEL c

potentially get rerated. We strongly believe that BHEL should not be underplayed by competition

the stock

should

continue

to

trade

at

a PE

multiple

of

24

‐25x

one

year

forward

earnings

(averag

multiple during 2007‐2009 – exhibit 23).

Exhibit 22: Superior RoE and growth profile for BHEL

BHEL

AlstomSiemens

Toshiba

Schneider

Mitsubishi

L&T

‐30%

‐20%

‐10%

0%

10%

20%

30%

‐20% ‐10% 0% 10% 20% 30% 40% 50%

3 y e a r P A T

C A G R

Return on Equity (RoE)

Source: Bloomberg, Quant Broking estimates

Exhibit 23: Historical PE band chart for BHEL

0

500

1,000

1,500

2,000

2,500

3,000

A p r ‐

0 2

O c t

‐ 0 2

A p r ‐

0 3

O c t

‐ 0 3

A p r ‐

0 4

O c t

‐ 0 4

A p r ‐

0 5

O c t

‐ 0 5

A p r ‐

0 6

O c t

‐ 0 6

A p r ‐

0 7

O c t

‐ 0 7

A p r ‐

0 8

O c t

‐ 0 8

A p r ‐

0 9

Px Last 10x

15x 20x

25x 30x

Source: Bloomberg, Quant Broking





Discounted cashflow methodology – 18 month target price of Rs 2,680 per share

With a very high revenue visibility and long term stability provided by immense power se

opportunity in the country, we believe that Discounted Cash Flow methodology is apt for val

BHEL. We arrive at an 18 month target price of Rs 2,680 per share based on our 3 stage DCF mo

providing an upside of 18% from current level.

Exhibit 24: DCF assumptions

DCF assumptions

Rf 7.0%

ERP 6.0%

Beta (x) 1.0

WACC 13.0%

Terminal growth ra te 5.0%

Su m of Disounted FCFF (INR mn) 446,084

PV of Terminal value (INR mn) 738,367

Firm Value (INR mn) 1,184,450

Less : Net debt (INR mn ) ‐127,375

Equity Value (INR mn ) 1,311,825

No. of shares O/S (mn) 490

Intrinsic value (Rs/ share) 2,680

Source: Quant Broking estimates

Exhibit 25: Sensitivity analysis

3% 4% 5% 6% 7

11% 2,590 2,844 3,183 3,657 4,3

12% 2,431 2,634 2,895 3,243 3,7

13% 2,305 2,471 2,680 2,948 3,3

14% 2,201 2,341 2,512 2,726 3,0

15% 2,115 2,234 2,378 2,554 2,7

W A C C

Terminal growth

Source: Quant Broking estimates





Investment risks and concerns

New entrants trying to set up capacities – intensifying competition

Competition is likely to increase for both BHEL and Chinese competitors with players like L&T (JV w

MHI), Bharat Forge (JV with Alstom), JSW group (JV with Toshiba) and Thermax (technology tran

agreement with B&W) eyeing opportunities in the Indian Power sector. Though it is still some t

for

capacities

of

these

players

to

come

on

stream,

players

like

L&T‐

MHI

JV

has

already

started

to

market share away from incumbents.

xhibit 26: Capacity expansion for BTG equipments in India over next 2‐3 years

New capacity ( MW) Lik ely year of commissioning Remarks

Alstom ‐ Bharat Forge 5,000 FY12

To se t up capacity for Supercritical Turbine & Generator (TG) (incl auxil ia

for TG i s l an d ) for thermal a nd nuclear power plants with a planned cape

USD 500 mn

Ansaldo ‐ Gammon * 2,500 FY11/ 12

To se t up Subcritical a nd Supercritical Boiler capacity with a proposed ca

Euro 70 mn

Larsen & Toubro ‐ Mi ts ubi s hi 4,000 FY10

To se t up Supercritical BTG capacity (500 ‐ 1,000 MW) with a planned cape

INR 9 bn

Rel.(ADAG)‐Shanghai El ectri c 10,000 NA NA

Toshiba‐

JSW 3,000 FY11

To se t up Supercritical turbine capacity (500 ‐ 1,000 MW) with a planned c

of USD

160

mn

24,500

indicative capacity ource: Company, Quant Broking

Delay in plan capacity addition and ordering

We expect ~65 GW of capacity addition in XI plan and ordering to the tune of ~100 GW in XII p

Any significant delay in capacity adddition in XI plan and ordering for XII plan is likely to seve

impact BHEL’s performance.





Exhibit 27: Financial Summary

Income statement FY08 FY09 FY10E FY11E

Income from operations 197,269 271,440 323,870 410,254

Direct costs 109,553 161,727 187,517 238,449

Employee costs 26,077 41,487 46,816 58,952

Other expenses 24,225 23,912 29,427 37,281

Total operating expenses 159,855 227,126 263,760 334,682

EBITDA 37,414 44,315 60,109 75,572

Depreciation and

amortisation 2,972 3,431 6,394 8,612

EBIT 34,442 40,884 53,715 66,960

Interest expense 354 352 450 569

Other income 10,225 7,847 8,027 8,681

Profit before tax 44,313 48,380 61,292 75,072

Provision for tax 15,711 17,228 21,720 26,595

Extraordinary income/ (loss) (9) ‐ ‐ ‐

Profit after tax 28,593 31,152 39,572 48,477

Basic EPS (INR) 58.4 63.6 80.8 99.0

Fully diluted EPS (INR) 58.4 63.6 80.8 99.0

Dividend per share (INR) 15.3 19.1 24.3 24.8

Equity shares outstanding (mn) 490 490 490 490

Diluted number

of

shares

(mn) 490 490 490 490

Balance sheet FY08 FY09 FY10E FY11E

Equity capital 4,895 4,895 4,895 4,895

Reserves & surplus 102,847 123,065 148,748 183,046

Shareholders funds 107,742 127,960 153,643 187,941

Secured loans 0 0 0 0

Unsecured loans 952 952 952 952

Borrowings 952 952 952 952

Total sources of funds 108,694 128,912 154,595 188,893

Gross block 43,843 53,424 74,924 82,924

Depreciation 34,031 37,462 43,856 52,467Net block 9,813 15,962 31,068 30,456

Capital work in progress 6,580 0 0 0

Total fixed assets 16,393 15,962 31,068 30,456

Investments 83 83 83 83

Inventories 57,364 67,629 78,537 99,655

Sundry debtors 119,749 133,084 167,475 212,173

Cash and equivalents 83,860 100,628 96,578 128,244

Loans and advances 16,074 19,417 24,434 30,956

Total current assets 277,047 320,757 367,024 471,027

Sundry creditors and others 165,765 183,810 213,459 270,855

Provisions 32,444 37,459 43,502 55,199

Total CL & provisions 198,208 221,270 256,960 326,053

Net current assets 78,839 99,487 110,064 144,974

Net deferred tax 13,379 13,379 13,379 13,379

Uses of funds 108,694 128,912 154,595 188,893





Cash flow statement FY08 FY09 FY10E FY11E

Operating Profit before tax 44,313 48,380 61,292 75,072

Add: Deprecia ti on 2,972 3,431 6,394 8,612

Add: Non cash expenses

Less: Taxes pa i d (15,711) (17,228) (21,720) (26,595)

Less: Exceptional items pa i d (9) ‐ ‐ ‐

Add: Othe rs (4,140) ‐ ‐ ‐

Gross Cash Flow 27,426 34,582 45,966 57,089

Less:Changes In Working Ca pita l (13,361) 3,881 14,627 3,244

Cash Flow from operating activities 40,787 30,702 31,339 53,845

Ca pe x 6,340 3,000 21,500 8,000

Investments ‐ ‐ ‐ ‐

Cash Flow from investing activities 6,340 3,000 21,500 8,000

Share Issuance/(Buyback) ‐ ‐ ‐

Increase i n debt 59 ‐ ‐ ‐

Dividend Pa id (8,734) (10,934) (13,889) (14,179)

Financing cash flow (8,675) (10,934) (13,889) (14,179)

NET CASH FLOW 25,771 16,768 (4,050) 31,666

Opening cash an d cash equi va l ents 58,089 83,860 100,628 96,578

Closing cash an d cash equi va l ents 83,860 100,628 96,578 128,244

Key ratios FY08 FY09 FY10E FY11E

Profitability (%)

EBITDA ma rgins 19.0 16.3 18.6 18.4

EBIT ma rgi ns 17.5 15.1 16.6 16.3

Net profit margi ns 14.5 11.5 12.2 11.8

Growth metrics (%)

Revenues 12.0 37.6 19.3 26.7

EBITDA 3.8 18.4 35.6 25.7

Net profi t 18.4 8.9 27.0 22.5

EPS 18.4 8.9 27.0 22.5

Operating ratios (%)

Total Asset Turnover(x) 2.0 2.3 2.3 2.4

Fixed Assets turnover (x) 20.0 21.1 13.8 13.3

Net debt/Equity

(x) (0.8) (0.8) (0.6) (0.7)

Current Ratio (x) 1.4 1.4 1.4 1.4

Valuations ratios

ROAE (%) 29.2 26.4 28.1 28.4

ROACE (%) 34.9 34.4 37.9 39.0

Diluted PE (x) 38.7 35.6 28.0 22.9

Pri ce/BV(x) 10.3 8.7 7.2 5.9

EV/EBITDA (x) 27.4 22.7 16.8 13.0

Source: Company Data, Quant Broking





Ratings and other definitions

Stock rating system

BUY. We expect the stock to deliver >15% absolute returns

ACCUMULATE. We expect the stock to deliver 5‐15% absolute returns

REDUCE. We expect the stock to deliver +5% to ‐5% absolute returns

SELL. We expect the stock to deliver negative absolute returns of >5%

Not Rated

(NR).

We

have

no

investment

opinion

on

the

stock.

Sector rating system

Overweight. We expect the sector to relatively outperform Sensex

Underweight. We expect the sector to relatively underperform Sensex

Neutral. We expect the sector to relatively perform in‐line with Sensex

We Krishnakant Thakur & Pawan Parakh hereby certify that all of the views expressed in this report accura

reflect our personal views about the subject company or companies and its or their securities. We also certify

no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendation

views expressed in this report"

Quant Group generally prohibits its analysts, persons reporting to analysts, and members of their households from maintain

financial interest

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securities

or

derivatives

of

any

companies

that

the

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Additionally,

Quant

Group

gene

prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of

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commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and

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