Bharat Heavy Electricals Ltd (BHEL) - Sify.comim.sify.com/sifycmsimg/jan2010/Finance/14928740_BHEL_Dec09_Res… · BHEL plans to expand its manufacturing capacity from 10,000 MW to

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Firstcall India Equity Advisors Pvt Ltd

Bharat Heavy Electricals Ltd (BHEL)

HOLD Target Price: Rs.2700.00

CMP: Rs.2350.00 Market Cap.:Rs.1150372.00 mn.

Date: January 22nd

, 2010

Key Ratios:

Particulars FY09 FY10E FY11E

OPM (%) 19.41 21.41 20.53

NPM (%) 11.68 12.93 12.37

ROE (%) 24.25 22.05 20.20

ROCE (%) 37.28 33.73 30.91

P/BV(x) 5.68 6.93 5.53

P/E(x) 23.40 31.42 27.38

EV/EBDITA(x) 14.10 21.81 20.36

Debt-Equity(x) 0.01 0.01 0.01

Key Data:

Sector Capital Goods

Face Value Rs.10.00

52 wk. High/Low 2550.00/1251.00

Volume (2 wk. Avg.) 94000

BSE Code 500103

SYNOPSIS

• BHEL is one of the largest engineering and

manufacturing enterprises in India ranked among

the leading Power Plant Manufacturers in the world.

• The company’s current order book stands at Rs.1,

34,000.00 cr which represents 4.9x of FY09 revenue

and provides strong revenue visibility for the near-

to-medium term.

• BHEL is in talks with global players, including Alstom

and Toshiba, for manufacturing nuclear reactors to

provide end-to-end solutions. Its initiative in nuclear

power and super critical segment as key positives

for future growth.

• BHEL plans to expand its manufacturing capacity

from 10,000 MW to 15,000 MW and are planning

20,000 MW plant by 2011-2012.

• BHEL becomes the largest supplier in the world for

high-rating Disc Insulators for 800 kV HVDC

Transmission Lines.

• The top line and bottom-line of the company are

expected to grow at a CAGR of 20.60% and 13.69%

over FY08 to FY11E.

Share Holding Pattern:

V.S.R. Sastry

Vice President

Equity Research Desk

91-22-25276077

[email protected]

Dr. V.V.L.N. Sastry Ph.D.

Chief Research Officer

[email protected]

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Table of Content

Content Page No.

1. Investment Highlights 03

2. Company Profile 10

3. Peer Group Comparison 18

4. Key Concerns 09

5. Financials 19

6. Charts & Graph 21

7. Outlook and Conclusion 23

8. Industry Overview 24

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Investment Highlights

• Results Update (Q3 FY10)

For the quarter ended on December 31, 2009 (Standalone) the company has registered a 17.57

% (YOY) growth in the net sales and stood at Rs.72292.20 mn from Rs.61488.40 mn of the

corresponding period of the previous year. The operating profit for the quarter stood at

Rs.17549.80 mn from Rs.13270.00 mn, for the same quarter of last year. Operating profit margin

surged to 24.28% from the corresponding previous quarter of 12.37% .The Company’s net profit

at Rs10725.90 mn registering a growth of 35.67% as against 7905.60mn in the same period last

year.EPS for the quarter stood at Rs.21.91 per equity share of Rs.10.00.

Quarterly Results – Standalone (Rs in mn)

As at Q3FY09 Q3FY10 %Change

Net Sales 61488.40 72292.20 17.57%

Net Profit 7905.60 10725.90 35.67%

Basic EPS(Rs) 16.14 21.91 35.75%

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• Margins (%):

Operating Profit Margins (OPM %)

Net Profit Margins (NPM %)

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• Strong Order Book

The company has an outstanding order book position of about Rs. 134000.0 crores at the end of

Q3FY10. The company bagged orders worth ~Rs35,000 corer in M9FY2010 to erect 11,700

megawatt (MW) of power capacity. Of these, orders for 11,200MW of capacity were secured

from independent power producers and the same constituted about 94% of the company’s

order book. As the company had bagged ~Rs20,000 crore worth of orders during H1FY2010, this

implies that BHEL has bagged ~Rs15,000 crore of orders during Q3FY2010. Further, BHEL has

guided for an order intake of Rs55,000 crore for FY2010. To achieve this, ~Rs20,000 crore worth

of orders need to be booked by the company in Q4FY2010. This seems achievable looking at the

bids in the pipeline for the supercritical power projects (especially those in joint venture with

the state utilities). However, any delay in these projects will affect the company’s ability to

achieve the order inflow target.

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• Tied up with Alstom

BHEL has also tied up with Alstom to manufacture electrical locomotives. The Indian Railways is

preparing to select, via a tendering process, a consortium that would put up a plant at Dankuni,

West Bengal, to produce electrical locomotives. BHEL and Alstom would bid as a consortium,

and, if they win the bid, they will form a joint venture.

• BHEL becomes the largest supplier in the world for high-rating Disc Insulators

BHEL becomes the largest supplier in the world for high-rating Disc Insulators for 800 kV HVDC

Transmission Lines; Bags single-largest order for 4.53 lakh Disc Insulators.It’s sustained focus on

developing new technologies and products through in-house R&D initiatives has once again paid

rich dividends to the company with the successful commercialization of the world’s first

indigenously-developed 420 kN Anti-fog Porcelain Disc Insulators for application in + 800 kV High

Voltage Direct Current (HVDC) Transmission Lines.

• BHEL develops India's first High Temperature Superconducting Transformer

Bharat Heavy Electricals Limited (BHEL)’s sustained focus on developing new technologies and

products through in-house R&D initiatives has once again paid rich dividends to the company

with the successful indigenous development of the country’s first High Temperature

Superconducting Transformer (HTSC).

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• BHEL bags orders worth of Rs.900 cr from ONGC

The company has received orders worth Rs 900 crore from Oil and Natural Gas Commission

(ONGC) to supply six on-shore oil rigs. Four rigs will be for Sibsagar in the eastern region, one rig

each for Krishna-Godavari Basin and Ankaleswar. The first rig will be delivered to the oil

exploration major in 18 months from the date of the order. ONGC has completed the

negotiations and is set to issue written orders by this month end.

• Declares Interim Dividend

The company has declared payment of Interim Dividend @ 110% i.e. Rs. 11 per Equity Share for

the financial year 2009-10.

• NTPC-BHEL to set up Rs.60, 000 mn plant in Andhra.

NTPCBHEL Power Projects Private Ltd (NBPPL), manufacturing plant of the NTPC-BHEL joint

venture, will be set up at Mannavaram in Andhra Pradesh with an investment of Rs.60000mn.

The plant is slated to be fully operational by 2014. The integrated plant, which will have capacity

to manufacture up to 5,000 Mw of power equipment annually, will come up at Mannavaram in

Chittoor district of Andhra Pradesh, about 120 km from Chennai. This will be the first integrated

plant in India to manufacture turbines, generators and boilers under one roof.

• Plans to set up 250 MW solar photovoltaic project at Hyderabad

The company will set up a 250 MW solar photovoltaic project at Fab City in Hyderabad. It will

come up with an investment of Rs.5000mn. Bharat Electronics Ltd (BEL) and BHEL have signed a

Memorandum of Understanding (MoU) to explore a 250 MW joint manufacturing facility for

solar photo voltaic cells, modules and silicon wafers project.

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• Rs 1 bn exports by 2011-12

The Ranipet unit of BHEL is eyeing to increase its export business to Rs 1 billion by 2011-12 from

the current Rs 300 million. The unit is also planning to enter the US and European markets in the

next 2 years. It currently caters to countries like Malyasia, Libya, Africa, Egypt and West Asia.

• Joint venture with KEL

BHEL and manufacturing enterprise in India in the energy-related infrastructure sector and

Kerala Electrical and Allied Engineering Company Limited (KEL), a Govt. of Kerala undertaking

have signed a Memorandum of Understanding (MoU) for setting up a Joint Venture (JV).

• Joint venture with TNEB

BHEL and TNEB had signed a Joint Venture Agreement on November 26, 2008, for setting up the

first Supercritical Thermal Power Project in Tamil Nadu.

• BHEL to invest Rs.2,500 Million

As part of its manufacturing capacity expansion programme, Bharat Heavy Electricals Limited

(BHEL) is setting up a new manufacturing plant in Tamil Nadu. The new unit is being set up by

BHEL at an initial investment of Rs.2,500 Million and the project will be funded through internal

accruals.

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• Expansion plans

The company's equipment share in current installed capacity of about 140,000 MW of utility sets

in the country is around 65%. BHEL plans to expand its manufacturing capacity from 10,000 MW

to 15,000 MW and are planning 20,000 MW plant by 2011-2012. 12th Five Year Plan is likely to

set target of ~95,000MW of incremental capacity and BHEL remains confident of maintaining its

market share at 60-65% in it.

The expanded capacity is likely to be utilized to execute these incremental orders. BHEL has said

it would invest Rs.12.5bn to expand its capacities to the target level of 15,000MW by end of

FY10E.Power generation in the country received a boost with BHEL built thermal sets generating

over 4% more power in fiscal 2008-09, compared to the previous fiscal. During the year, these

sets registered a record generation of 403.43 billion units of electricity against 387.71 billion

units in the year before. Significantly, this constituted 79% of the total power generated in the

country from coal-based thermal sets.

Such a massive expansion in capacity will equate to a 70 per cent share of the 100,000 MW of

additional power generating capacity proposed in the 12th Plan period. Newer plants will be set-

up, which can produce Super Critical Boilers of 660 MW and 800 MW and the Trichy plant will

have it’s annual production capacities tripled to meet burgeoning demand.

• Planning to increase expenditure in R&D

The company’s corporate R&D will invest Rs 8 billion in research and development (R&D) during

fiscal 2009-10, 26% more than its investment of Rs 6.5 billion last fiscal.

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Company Profile

BHEL is the largest engineering and manufacturing enterprise in India in the energy related

sector. BHEL manufactures over 180 products under 30 major product groups and caters to core

sectors viz., Power Generation & Transmission, Industry, Transportation, Telecommunication,

Renewable Energy, etc. The company has 14 manufacturing divisions, four Power Sector regional

centers, over 100 project sites, eight service centers and 18 regional offices. BHEL has installed

capacity of 10,000MW in power segment.BHEL supplied equipments account for more than 65%

of the total installed Thermal Generating capacity in India and contribute approx. 73% of the

Total Power Generation in the country.

Business Area

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1. Power generation

Power Generation Sector comprises Thermal, Gas, Hydro and Nuclear power plant business.BHEL-

supplied sets account for 85,786 MW or around 64% of the total installed capacity of 1,34,697

MW in the country. Significantly, these sets generated an all-time high 454.59 Billion Units of

electricity contributing 73% of the total power generated in the country. The cumulative capacity

of projects installed worldwide have crossed 1, 00,000 MW. BHEL has proven turnkey capabilities

for executing power projects from Concept to Commissioning.

The company has introduced new rating thermal sets of 270 MW, 525 MW & 600 MW in

subcritical range and possesses the technology & capability to produce large capacity thermal sets

with super critical parameters andgas turbine-generator sets. Co-generation and Combined cycle

plants have been introduced to achieve higher plant efficiencies. To make efficient use of the high

ash content coal available in India, BHEL also supplies Circulating Fluidized Bed Combustion (CFBC)

boilers for thermal plants. The Company manufactures 220/235/500/540 MWe, nuclear turbine-

generator sets. Custom-made hydro sets of Francis, Pelton and Kaplan types for different head-

discharge combinations are also engineered and manufactured by BHEL.

The Company has proven expertise in Plant Performance Improvement through Renovation,

Modernization and Uprating of a variety of power plant equipment, besides specialized know-how

of residual life assessment, health diagnostics and life extension of plants. BHEL built thermal sets

consistently exceed the national average efficiency parameters and have achieved the highest-

ever Plant Load Factor (PLF) of 80.4% during 2007-08, which is 2.5% higher than the national

average. Operating Availability (OA) was also he highest-ever at 86.7%. BHEL is one of the few

companies worldwide, involved in the development of Integrated Gasification Combined Cycle

(IGCC) technology which would usher in clean coal technology. BHEL has set up Asia’s first 6.2 MW

IGCC power plant with an indigenously designed pressurised fluidised bed gasifier. The company

has also signed an MoU with APGENCO for setting up a 125 MW IGCC plant at Vijayawada.

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a) Transmission:

BHEL is today a well established player in the field of power transmission with some major

products and systems in its range of manufacturing and supply. Transmission Business Group in

BHEL undertakes projects on turnkey basis covering the complete engineering, procurement,

supply, construction, commissioning and after sales,service for AC switchyards/substations upto

400KV with capability upto 765 kV capability to conduct System studies as required for above

business. BHEL today is the market leader in turnkey substation business of 220/400 KV class and

is also the largest transformer manufacturer in the country with the distinction of being the only

Indian company in the field of HVDC technology.

b) Future Power Generation & Transmission requirements in India

Government of India has ambitious plans of adding new generation capacities of 77577 MW in the

XIth 5-year plan (2007 to 2012) and another 82000MW is projected to be added during the XIIth 5

year plan (ending 2017). The associated transmission system for evacuation of power has been

planned and inter-regional transmission capacity has been planned to be enhanced to 37150 MW

by end of XIth plan i.e. March 2012.Major investments are planned for building high capacity

transmission highways consisting of 400KV and 765KV transmission lines and HVDC bipoles to

evacuate power from North Eastern region and Eastern regions of the country. POWERGRID, the

Central Transmission Utility in the country is also planning to move to next higher voltage for the

grid by setting up the first 1200KV transmission line by 2012-13. POWERGRID has projected that

by 2025-26 there shall be around 35 nos 1200KV substations having 100,000 MVA transformation

capacity.

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2. Industries

BHEL manufactures and supplies major capital equipment and systems like Captive power plants,

Centrifugal compressors, Drive Turbines, Industrial boilers and auxiliaries, Waste heat recovery

boilers, Gas turbines, Pumps, Heat exchangers, Electrical machines, Valves, Heavy castings and

forgings, Electrostatic precipitators, ID/FD fans, Seamless pipes etc. to a number of industries, like

metallurgical, mining, cement, paper, fertilizers, refineries & petro-chemicals etc., other than

power utilities. BHEL has also emerged as a major supplier of controls and instrumentation

systems, especially distributed digital control systems for various power plants and industries.

3. Transportation

Most of the trains in Indian Railways, whether electric or diesel powered, are equipped with

BHEL’s traction propulsion system and controls. The systems supplied are both with conventional

DC drives and state-of-theart AC drives. India’s first underground metro at Kolkata runs on drives

and controls supplied by BHEL. The company also manufactures complete Rolling stock i.e. Electric

locomotives up to 5000 HP and EMU coaches and Diesel Electric locomotives from 350 HP to 3100

HP for both mainline and shunting duty applications. BHEL also undertakes retrofitting and

overhauling of rolling stock. In the area of urban transportation, BHEL is geared up for turnkey

execution of electric trolley bus systems, light rail systems and metro systems. BHEL is contributing

to the supply of electrics for EMUs for 1500V DC & 25 kV AC to Indian Railways. Almost all the

EMUs in service in India are with the electrics manufactured and supplied by BHEL.

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4. Renewable Energy

BHEL has been manufacturing and supplying a range of Renewable Energy systems and products.

It includes Solar Energy systems viz. PV modules, PV power plants, Street lighting, Solar pumps and

Solar water heating systems. A large number of small hydro power stations have also been

completed. In line with the efforts being made at national level for development of remote areas,

BHEL has commissioned six stand alone Solar Photovoltaic (SPV) power plants of 3x110 KWp and

3x55 KWp capacities in Sunderbans (West Bengal). 57 Sets of Solar PV operated petrol pumps are

being supplied to M/s HPCL to illuminate and run the company-owned petrol pumps smoothly

irrespective of Grid power outage.

a) Oil and Gas

BHEL is supplying onshore drilling rig equipment viz. Draw works, Rotary-table, Traveling block,

Swivel, Mast and Sub structure, Mud systems and Rig electrics to ONGC and Oil India Ltd. Well

heads & X-Mas tree valves upto 10,000 psi rating for onshore as well as offshore application are

being supplied to ONGC, Oil bIndia Ltd. and Private Drilling Companies.

BHEL has also supplied Casing Support System, Mudline Suspension System and Block Valves to

ONGC for offshore application. It also has the capability to supply complete onshore Drilling rigs,

Super-deep drilling rigs, Desert rigs, Mobile rigs, Work over rigs and sub-sea well heads. Currently,

BHEL is executing orders for refurbishment and upgradation of onshore Oil Rigs from ONGC & Oil

India Ltd. BHEL has supplied GT driven centrifugal compressorpackages to GAIL India Ltd. for their

gas compressor stations for the Dahej - Vijaipur gas pipeline project.

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5. International Business

BHEL has, over the years, established its references in 70 countries across all inhabited continents

of the world. These references encompass almost the entire range of BHEL products and services,

covering Thermal, Hydro and Gas-based turnkey power projects, Substation projects,

Rehabilitation projects, besides a wide variety of products like Transformers, Compressors, Valves,

Oil field equipment, Electrostatic Precipitators, Photovoltaic equipment, Insulators, Heat

Exchangers, Switchgears, Castings and Forgings etc. Some of the major successes achieved by

BHEL have been in Gas-based power projects in Oman, Libya, Malaysia, Saudi Arabia, Iraq,

Bangladesh, Sri Lanka, China, Kazakhstan; Thermal power projects in Cyprus, Malta, Libya, Egypt,

Indonesia, Thailand, Malaysia,\ Sudan; Hydro power plants in New Zealand, Malaysia, Azerbaijan,

Bhutan, Nepal, Taiwan, Tajikistan, Thailand, Afghanistan; and Substation projects & equipment in

various countries. Execution of these overseas projects has also provided BHEL the experience of

working with world renowned consulting organizations and inspection agencies.

The company has been successful in meeting then demanding requirements of international

markets in terms of complexity of work as well as technology, quality and other requirements viz.

HSE requirements, financing packages and associated O&M services, to name a few.BHEL has

proved its capability to undertake projects on fast-track basis.

The company has also established its versatility to successfully meet the varying needs of different

sectors, be it captive power, utility power generation or the oil sector. Besidesundertaking turnkey

projects on its own, BHEL also possesses the requisite flexibility to interface and complement

other international companies for large nprojects, and has also exhibited adaptability by

manufacturing and supplying intermediate products.The company is taking a number of strategic

business initiatives to fuel further growth in overseas business. This includes firmly establishing

itself in target export markets, positioning of BHEL as a regular EPC contractor in the global market

both in utility and IPPm segments and exploring various opportunities for setting up overseas joint

ventures etc.

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Joint ventures

The two Joint Venture Companies promoted by BHEL viz. “BHEL-GE Gas Turbine Services Ltd.”

(BGGTS)m with GE, USA for repair & servicing of GE designed= Gas Turbines and “Power plant

Performance Improvement Ltd.” (PPIL) with Siemens AG, Germany for plant performance

improvement of old fossil fuel power plants, have now completed ten full financial years of

operation.

a) BGGTS

BGGTS achieved a sales turnover of Rs. 327 crore during the year 2007-08 with a profit after tax of

Rs. 46 crore. Orders for Rs. 392 crore were booked by BGGTS during the year including export

orders from overseas GE shops viz. GTS-Abu Dhabi, GE Basil don and GE-MEELSA.

BGGTS successfully completed gas turbine servicing & supply of spares to various customers like

RGPPL, ONGC-Uran, bTNEB, RIL- Jamnagar, ONGC – Hazira, IOCL, PPCL, BPCL etc. BGGTS also

completed export orders for repair of FR 6 and FR 7 gas turbine shrouds for GE-MEELSA and

replacement of damaged rotor for BPDB, Bangladesh. For the year 2007-08, BGGTS has declared a

dividend of 600% thereby maintaining its consistent record of improved performance. BGGTS has

also successfully completed surveillance audit for ISO 9001, ISO 14001 & OHSAS 18001

certification.

b) PPIL

PPIL has made further progress in settlement of outstanding issues and collection of withheld

payments for pending contracts. Since, sufficient business to ensure viability of the company has

not been forthcoming both the promoter partners have mutually agreed to gradually wind up the

company.

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New Joint Ventures Launched

1) During the year 2007-08 BHEL has also entered into a Joint Venture Agreement with NTPC for

setting up of a Joint venture company “NTPC BHEL Power Projects Private Limited” for carrying out

EPC contracts for Power Plants and other Infrastructure Projects in India and Abroad.

The JV Company can also take up manufacture and supply of equipments, for power plants and

other infrastructure projects, which are not subject to any limitation or restriction under any

ongoing collaboration agreement of promoter companies. The JV Company has subsequently been

incorporated in April, 2008 and detailed business plans are being worked out.

2) A MoU has been signed between BHEL

TNEB to set up a joint venture company to build, own and operate a 1600 MW (2X800 MW) Super

Critical Thermal Power Plant at Udangudi, Tamilnadu.

3) A MoU has been signed between BHEL and Nuclear Power Corporation of India Ltd. to form a

joint venture to carry out EPC activities for power plants (conventional island only) based on

atomic energy both within the country and outside.

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Peer Group Comparison

Name of the

company

CMP(R.s)

(As on Jan

22,2010)

Market

Cap.

(Rs. Mn.)

EPS

(Rs.)

P/E (x) P/BV

(x)

Dividend

(%)

BHEL 2350.00 1150372.00 76.58 30.69 8.89 170.00

ABB 807.35 171084.20 20.68 39.04 8.13 110.00

L&T 1472.35 883811.70 78.26 18.81 7.11 525.00

BEL 1997.50 159800.00 124.03 16.10 4.20 187.00

Key Concerns

• Glob economic slowdown

• Slow execution of orders

• Slow down in the capital goods sector

• More number of players and tough competition

• In most of the business areas in which BHEL operates, the growth prospects are also

dependent on policy decisions at the national level and prevailing business trends.

• Higher prices of oil and gas are making coal morecompetitive as a fuel for base load

generation.

• The outlook for coal use would depend largely on relative fuel prices, government policies on

fuel diversification, climate change & air pollution and developments in clean coal

technologies in power generation.

• Chinese competition

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Financials 12 Months Ended Profit & Loss Account (Standalone)

Value(Rs. in million) FY08A FY09A FY10E FY11E

Description 12m 12m 12m 12m

Net Sales 193654.60 268586.30 283032.24 339638.69

Other Income 13962.30 7879.80 8172.03 8580.63

Total Income 207616.90 276466.10 291204.27 348219.32

Expenditure -159986.70 -224327.80 -230612.7 -278503.7

Operating Profit 47630.20 52138.30 60591.57 69715.60

Interest -354.20 -307.10 -232.26 -201.33

Gross Profit 47276.00 51831.20 60359.31 69514.27

Depreciation -2972.10 -3342.70 -4054.35 -4865.22

Profit before Tax 44303.90 48488.50 56304.96 64649.05

Tax -15710.50 -17106.40 -19696.41 -22627.17

Profit after Tax 28593.40 31382.10 36608.55 42021.88

Net profit 28593.40 31382.10 36608.55 42021.88

Equity Capital 4895.20 4895.20 4895.20 4895.20

Reserves 102846.90 124492.90 161101.45 203123.33

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 489.52 489.52 489.52 489.52

EPS(Rs) 58.41 64.11 74.78 85.84

A=Actual, E=Estimated

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs. in million) 30-June-09 30-Sep-09 31-Dec-09 31-Mar-10E

Description 3m 3m 3m 3m

Net Sales 56,714.20 67,275.20 72,292.20 86,750.64

Other Income 2,270.90 1,955.00 1,932.90 2,013.23

Total Income 58,985.10 69,230.20 74,225.10 88,763.87

Expenditure -50,794.60 -54,956.80 -56,675.30 -68,186.00

Operating Profit 8,190.50 14,273.40 17,549.80 20,577.87

Interest -42.8 -45.2 -69.00 -75.26

Gross Profit 8,147.70 14,228.20 17,480.80 20,502.61

Depreciation -961 -934.1 -1,038.10 -1,121.15

Profit before Tax 7,186.70 13,294.10 16,442.70 19,381.46

Tax -2,480.80 -4,715.30 -5,716.80 -6,783.51

Profit after Tax 4,705.90 8578.8 10,725.90 12,597.95

Net Profit 4,705.90 8,578.80 10,725.90 12597.95

Equity Capital 4,895.20 4895.2 4,895.20 4,895.20

Face Value 10.00 10.00 10.00 10.00

Total No. of Shares 489.52 489.52 489.52 489.52

EPS(Rs) 9.61 17.52 21.91 25.74

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Charts

A) Net Sales & Net Profit Chart

B) EV/EBITDA (X) Chart

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C) P/E(x)

D) P/BV (X)

23


1 Year Comparative Graph

BHEL BSE SENSEX

Outlook and Conclusion

• At the current market price of the stock Rs.2350.00, the stock trades at a P/E of 31.42 x and

27.38 x for FY10E and FY11E respectively.

• The EPS of the stock is expected to be at Rs.74.78 and Rs.85.84 for the earnings of FY10E and

FY11E respectively.

• The top line and bottom-line of the company are expected to grow at a CAGR of 20.60% and

13.69% over FY08 to FY11E.

• On the basis of EV/EBDITA, the stock trades at 21.81 x and 20.36x for FY10E and FY11E

respectively.

• On the basis of Price to Book Value of the stock is expected to be at 6.93 x and 5.53 x

respectively for FY10E and FY11E.

• BHEL has witnessed a robust growth in new orders over the past 5 years.

• BHEL is in talks with global players, including Alstom and Toshiba, for manufacturing nuclear

reactors to provide end-to-end solutions. Its initiative in nuclear power and super critical

segment as key positives for future growth.

• As the Government of India (GoI) plans to enhance total power generation capacity (~78 GW in

XIth five year plan) and renew the power transmission and distribution infrastructure of the

country, we expect the Company’s order book would get a further boost.

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• BHEL plans to expand its manufacturing capacity from 10,000 MW to 15,000 MW and are

planning 20,000 MW plant by 2011-2012.

• Over the next five-year period, in the pursuit of achieving globalization aspirations, BHEL aims

to grow the physical exports by six times the current size. Physical exports are expected to

contribute around Rs 60000-70000 mn to the company's turnover by 2011-12.

• Privatization of infrastructure should gather pace – a positive for developers and equipment

suppliers. There are more opportunities in roads, airports, power, railways and ports for

private project developers.

• We recommend ‘HOLD’ in this particular scrip with a target price of Rs.2700.00 for Medium to

Long term investment.

Overview of the Industry

Engineering Sector: Market & Opportunities

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India's engineering industry is highly competitive with a number of players in each segment. The

engineering sector has been growing, driven by growth in end user industries and the new

projects being taken up in the power, railways, infrastructure development, and private sector

investments fields amongst others. The industry attracted FDI inflows of US$ 1,196.7 million from

August 1991-July 2006.

India's exports of engineering goods are valued at US$ 27 billion during 2006-07 which represents

a 6 per cent growth over the exports for 2005-06 (US$ 20 billion). The engineering sector

accounted for 14 per cent of the country's total exports. It is also noteworthy that 40 per cent of

India's engineering export is from the small and medium enterprises (SME) sector. According to

Engineering Exports Promotion Council (EEPC), engineering exports could touch US$ 30 billion by

2008-09. In such a scenario, India, driven by the engineering sector, will emerge as a key global

manufacturing hub.

Industry demand is driven by investments in core sectors

The demand from this sector depends largely on GDP growth, which in turn is a function of

expenditure in core segments like power, railways, and infrastructure development, private sector

investments, and the speed at which projects are implemented. The power sector is the largest

contributor to the revenues of engineering companies. Engineering majors like Bharat Heavy

Electricals Limited (BHEL) and ABB Limited derive a significant chunk of their revenues (69 per cent

and 60 per cent, respectively) through the supply of equipment to the power sector.

Infrastructure is another key area of operation. Larsen & Toubro Limited, for example, garners

around 35 per cent of its sales from infrastructure activities like engineering, design and

construction of industrial projects, social and physical projects like housing, hospitals, information

technology (IT) parks, expressways, bridges, ports, and water/effluent treatment projects.

26


The industrial segment contributes to around 30 per cent of the total revenues of the engineering

sector. While India’s engineering industry has capabilities in manufacturing the range of

machinery required by the different user sectors, the rapid rise in demand has led to a large part

of the machinery requirements being met through imports. This indicates the size of opportunity

for investment in the engineering and capital goods sector in India. The engineering industry has

attracted FDI inflows of US$ 1,196.73 million from August 1991-July 2006.

Indian Engineering goods are gaining acceptance in overseas markets

India’s exports of engineering goods are valued at US$ 27 billion during 2006-07 which represents

a 36 per cent growth over the exports for 2005-06 US$ 20 billion). The engineering sector

accounted for 14 per cent of the country’s total exports. It is also noteworthy that 40 per cent of

India’s engineering export is from the small and medium enterprises (SME) sector. A key driver for

increased engineering exports is the trend towards shifting of global manufacturing bases to

countries like India that offer lower costs and good engineering talent. This trend is expected to

continue and boost exports of engineering goods from India over the next 5 years. According to

Engineering Exports Promotion Council (EEPC), engineering exports could touch US$ 30 billion by

2008-09. In such a scenario, India, driven by the engineering sector, will emerge as a key global

manufacturing hub.

The nature of Indian engineering exports is also changing with time. India is fast moving from

exporting low value goods to developing countries to more sophisticated goods targeted at

developed countries. Capital goods account for 27 per cent of total engineering exports. Exports to

European Union countries and North America accounted for 19 per cent and 17 per cent

respectively, of total engineering exports in 2005-06. Engineering goods worth US$ 3.34 billion

were exported to USA alone in April – Feb 2006-07.

27


Growing Demand

Capacity creation and transformation in sectors such as infrastructure, power, mining, oil & gas,

refinery, steel, automotive, consumer durables are driving growth in the engineering industry. The

framework below captures some of the key factors that are contributing to domestic and

international demand for engineering goods from India. Restructuring of the state electricity

boards in different states, growth of private sector players and focus on capacity creation have

driven growth in the power sector.

Conclusion

The Engineering sector’s future outlook is promising. Drivers like power projects, other

infrastructure development activities, industrial growth and favorable policy regulations will drive

growth in manufacturing. The Indian engineering industry has been witnessing significant level of

capability enhancement over the years. As export markets open up, this will help India develop a

strong presence in global engineering exports. Power sector contributes the largest to the

engineering companies’ revenues. Major players in this sector like ABB and BHEL derive 60 per

cent and 69 per cent of their revenues from supplying equipments to the power sector. Going

forward, with the Government clearing the blueprint for adding 100,000 MW in the tenth (2002-

07) and eleventh 2007-12) five-year plans, the potential are high for the engineering majors.

Emerging trends such as outsourcing of engineering services can provide new opportunities for

quantum growth. Engineering and design services such as new product designing, product

improvement, maintenance and designing manufacturing systems are increasingly getting

outsourced to countries like India and China. India’s engineering sector has significant potential for

future growth, in manufacturing as well as services.

28


With development in associated sectors like automotive, one of the largest evolving markets for

engineering and industrial goods, and a well developed technical human resources pool, India is

poised to make significant strides in all segments of engineering.

_____________________________________________________________

Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation for the

purchase or sale of any financial instrument or as an official confirmation of any transaction. The

information contained herein is from publicly available data or other sources believed to be reliable but we

do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity

Advisors Pvt. Ltd. or any of it’s affiliates shall not be in any way responsible for any loss or damage that may

arise to any person from any inadvertent error in the information contained in this report. This document is

provide for assistance only and is not intended to be and must not alone be taken as the basis for an

investment decision.

29


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