bharat heavy electricals
TRANSCRIPT
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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
+91 22 4088 0382
Pawan Parakh
+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
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Bharat Heavy Electricals
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
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Bharat Heavy Electricals
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
Source: CEA, Quant Broking
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
Source: CEA, Quant Broking
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Bharat Heavy Electricals
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.
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Bharat Heavy Electricals
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
Source: CEA, Quant Broking
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
Source: CEA, Quant Broking
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Bharat Heavy Electricals
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.
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Bharat Heavy Electricals
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
Source: CEA, Quant Broking Source: CEA, Quant Broking
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
Source: CEA, Quant Broking Source: CEA, Quant Broking
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.
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Bharat Heavy Electricals
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
Source: CEA, Quant Broking
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
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Bharat Heavy Electricals
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
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Bharat Heavy Electricals
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
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Bharat Heavy Electricals
September 2, 2009 11
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
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Bharat Heavy Electricals
September 2, 2009 12
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
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Bharat Heavy Electricals
September 2, 2009 13
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 ‐
Source: CEA, Quant Broking
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
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Bharat Heavy Electricals
September 2, 2009 14
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
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Bharat Heavy Electricals
September 2, 2009 15
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
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Bharat Heavy Electricals
September 2, 2009 16
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.
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Bharat Heavy Electricals
September 2, 2009 17
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
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September 2, 2009 18
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
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Bharat Heavy Electricals
September 2, 2009 19
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"
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or
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Additionally,
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Group
gene
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