JPM_Bharat_Heavy_Electri_2013-09-10_1208236

www.jpmorganmarkets.com

Asia Pacific Equity Research

10 September 2013

Bharat Heavy Electricals (BHEL)Underweight

BHEL.BO, BHEL IN

Back to the Drawing Board: Reiterate UWPrice: Rs142.95

Price Target: Rs110.00

India

India Infrastructure, Capital

Goods, Power & Construction

Sumit Kishore AC

(91-22) 6157-3581

[email protected]

Bloomberg JPMA KISHORE

J.P. Morgan India Private Limited

Deepika Mundra

(91-22) 6157-3582

[email protected]

J.P. Morgan India Private Limited

Boris Kan

(852) 2800-8573

[email protected]

J.P. Morgan Securities (Asia Pacific) Limited

YTD 1m 3m 12m

Abs -38.5% 21.8% -22.4% -27.8%

Rel -37.6% 15.9% -22.7% -37.7%

Bharat Heavy Electricals Ltd. (Reuters: BHEL.BO, Bloomberg: BHEL IN)

Rs in mn, year-end Mar FY12A FY13A FY14E FY15E

Revenue (Rs mn) 472,279 476,177 404,952 388,837

Adjusted Profit (Rs mn) 70,400 66,147 36,938 33,592

DPS (Rs) 6.40 5.41 5.00 5.00

Adjusted EPS (Rs) 28.76 27.03 15.09 13.72

Revenue growth (%) 21.7% 0.8% (15.0%) (4.0%)

Adjusted EPS growth 31.5% (6.0%) (44.2%) (9.1%)

ROCE 27.1% 20.6% 9.1% 7.2%

ROE 30.9% 23.7% 11.7% 10.0%

P/E (x) 5.0 5.3 9.5 10.4

P/BV (x) 1.4 1.1 1.1 1.0

EV/EBITDA (x) 2.4 2.6 3.8 3.6

Dividend Yield 4.5% 3.8% 3.5% 3.5%

Source: Company data, Bloomberg, J.P. Morgan estimates.

Company Data

Shares O/S (mn) 2,448

Market Cap (Rs mn) 349,884

Market Cap ($ mn) 5,363

Price (Rs) 142.95

Date Of Price 10 Sep 13

Free Float(%) 32.3%

3M - Avg daily volume (mn) 7.32

3M - Avg daily value (Rs mn) 995.42

3M - Avg daily value ($ mn) 15.3

NIFTY 5680.40

Exchange Rate 65.25

Fiscal Year End Mar

See page 26 for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that

the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

100

150

200

250

300

Rs

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

Price Performance

BHEL.BO share price (Rs)

NIFTY (rebased)

Policy tailwinds have boosted investment sentiment for BHEL over the past

fortnight and the stock has outperformed the Sensex by 30% since August 20.

CEA extended an Oct-10 advisory to government-owned utilities for sourcing

supercritical BTG indigenously. The government advocated a similar clause

for 4GW UMPPs and is aggressively targeting award of two such projects this

fiscal year. We believe the following factors will pull the stock down again,

and reiterate our UW rating with a Sep-14 PT of Rs110, implying 23%

downside potential.

#1. Conclusions from deep dive into thermal power plant capex. The

famine in new private power generation is likely to persist in our view. The

onus lies on state/central govt. utilities to drive new project awards. Our

study on status of 52GW pipeline government projects reveals that 8.4GW

is likely to get awarded in FY14, 17.1GW in FY15, and 12.2GW in FY16.

Our estimate builds in equipment award for 2x4GW UMPPs in FY15,

though none has been awarded since 2009. BHELs manufacturing

capacity alone is 20GW.

#2. Demand in the doldrums, no blue skies. YTD Indias peak power

demand supply deficit has collapsed and hit an all-time low of 2.7% in Aug-

13 (vs. ~10% average in CY12). We think this will cause developers to

rethink fresh capex and defer plans. 9.32GW expected for award over

FY14-FY15 is in states which are scheduled to go for assembly elections by

Apr-May 2014. Past average rate of developing captive coal blocks is ~8

years, new land bill is delay prone, and select states have funding

constraints.

#3. Local competition no paper tiger. We revisited progress on

manufacturing facilities of local competition. ~32GW boiler and 35GW of

TG manufacturing capacity is either operational or in an advanced stage of

set-up. Severe overcapacity-led pricing pressures are a certainty we think.

#4. Favorable tidings do not offset pressure on fundamentals. Declining

order book, underlying quality issues, capacity underutilization and

competitive pressures are likely to sustain EPS (below consensus) decline.

Lessons from BHEL valuation over last 20 years. During FY93-04,

average OPM was 10.7% (our terminal OPM is 11%) and the stock traded

well below 8x EPS. Better-than-expected order inflows is a key upside risk.

2Asia Pacific Equity Research

10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Company Description P&L sensitivity metrics EBITDA EPS

impact (%) impact (%)

BHEL is a power plant equipment

manufacturer with a capacity by end of

FY13 to supply 20GW per annum.

BHEL has an order backlog of Rs1.086

trillion, providing earnings visibility

through FY15E.

Execution

Impact of 5% decline in FY14 estimates -14.40% -14.30%

Operating profit margins

Impact of 100bps decrease in FY14 estimates -7.70% -7.60%

Source: J.P. Morgan estimates.

Price target and valuation analysis

We maintain our DCF-based Sep-14 PT of Rs110/share (WACC:

12.3%, terminal growth rate: 0%, terminal year: FY17). Our estimates

include a declining post tax EBIT thru FY17 on account of margin

contraction as well as declining revenue assuming investments in the

domestic power sector do not pick up meaningfully. Our PT implies a

multiple of 7.3x/8.0x FY14E/15E earnings. Reiterate UW.Revenue composition (FY13)

Rs. Bn. Rs./share

Sum of FCF 109 45

Terminal value 96 39

Enterprise value 205 84

Less: Net-debt/ (Net-cash) (63) (26)

Net present Equity value 268 110

Valuations could remain cheap in the absence of an improvement in the

ordering environment. A return to Rs400bn+ inflow run-rate is a risk to

our medium-term growth and margin assumptions. Other upside risks

include- fresh private sector coal block allocation, faster clearances and

award of projects/UMPPs despite elections is an upside risk, BHELs

ability to cushion margin fall by reigning in employee costs, order

inflow surprise from nuclear/defense/railways.

Source: Company reports.

EPS: J.P. Morgan vs. consensus

J. P. Morgan Consensus

FY14E 15.0 18.9

FY15E 13.9 15.5

Source: Bloomberg, J.P. Morgan estimates.

79%

21%

Power Industry


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Why has the stock rallied?

A slew of positive news flow has boosted investment sentiment for BHEL over the

past fortnight and the stock has outperformed the Sensex by 31% since 20 Aug, when

the stock touched a low of Rs101/share. We covered a few of the favorable tidings in

our 27 Aug research Note- Favorable tidings do not offset pressure on

fundamentals.

To summarize the reasons for the recent rally:

(a) CEAs Feb-10 advisory on sourcing of supercritical BTG from indigenous

manufacturers was applicable to bids invited by Central/State Power

projects till Oct-12. In a recent press release (uploaded on 4 Sep on CEA

website), the advisory has been extended for another period of 2 years, up to

October 2015 (see web-link to the CEA advisory). The document stipulates

that indigenous manufacturers awarded orders in the bulk order for

supercritical units undertaken by NTPC (660MW and 800MW series) shall

be required to conform to progress on manufacturing activities as per laid

down milestones since the date of award of the first such order. There is a

provision for LD for failure to meet various milestones of manufacturing,

going up to 5% of total contract value.

(b) An eGoM has mandated that bidders for UMPPs (and mega case-II projects)

will have to source equipment from domestic manufacturers (helps BHEL

and local equipment manufacturers). Two UMPPs of 4GW each are on

PMs wish list for accelerated award in FY14.

(c) The Ministry of Heavy Industries has proposed measures to support BHEL

by making it the nodal agency for executing overseas power projects funded

by the GoI, mandating indigenous manufacturing for prequalification in

fresh tenders and an additional 5% duty on imports. These proposals are yet

to be implemented and are being opposed by IPPs.

Captive coal blocks have been allocated to PSUs/States in early Jul-13 (though

the stock was at Rs189 then), which could make few pipeline power projects

more bankable.

What will pull it down again?

We think the recent rally is an opportunity to sell BHEL stock. The recent CEA

advisory is an extension of an old advisory issued in Oct-2010 and is not new; in fact

it was expected. No UMPPs have been awarded in India since Aug-09 and we find

FY14 target of awarding 2 UMPPs too aggressive. Ministry of Heavy Industries has

been garnering support for BHEL for the last few quarters but the reality is that even

the local market has become competitive with over 30GW of annual manufacturing

capacity for boilers and turbines and significantly fewer opportunities on the anvil

(ascertained from our deep dive into thermal power plant capex over next three

years).


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Based on recent data points, Indias peak power demand supply deficit has

fallen to a record low of 2.7% in Aug-13. The declining trend has persisted and we

believe this would cause developers to re-think fresh power plant capex and possibly

defer plans. Besides this upcoming state/general elections and weak financials of

select states may also be the cause of deferrals. The government agencies awarding

projects based on fuel security afforded by recent coal block allocations could be

cautious of past development track record where it takes ~8 years on average to

operationalize the mine.

It is equally important to note that the steep decline in stock price from ~Rs180

levels was triggered by an extremely weak Jun-q result, which was symptomatic

of severe medium-term execution and margin pressures. There are near and present

concerns regarding quality of current order backlog especially private sector jobs

owing to weak financials of customers and project clearance issues. We expect

revenue de-growth and margin erosion to persist through the balance of FY14 and

FY15.

Deep dive into thermal power plant capex

Private sector IPPs are wholly focused on operational and under construction

projects. Pipeline plans announced a few years back continue to be dormant.

Elevated leverage levels accompanied by prevailing high interest rates, lack of

visibility on fuel, power purchase agreement (PPA) uncertainties, delays in land

acquisition, environmental and forest clearance hurdles, weak electricity demand

growth in line with the slowdown in Indias GDP growth, declining short-

term electricity rates, weak INR, weak financial health of SEBs one or more of the

above factors have severely curtailed private sector appetite for new power plant

capex. Over the next 12 months there is practically no new private thermal

project on the anvil, which is likely to award a contract for main plant

equipment (boiler or turbine generator package) in our view.

In the medium term, thermal power plant capex shall primarily be driven by Central

and State government utilities. A key advantage of public sector projects under

development is that a large proportion of the plans are for Brownfield expansion with

extra land already in possession. Also the Jul-13 allocation of 14 coal blocks to

central PSUs (NTPC, NLC) and state power generating companies has made their

under development projects more bankable. Details on recent coal block allocations

are shown in Appendix I.

We did a detailed study of the thermal project pipelines of NTPC, NLC and

major states, adding to ~52GW to assess their maturity. Based on this, we have

drawn conclusions on the potential power plant equipment awards over the next 12-

36 months. The key conclusions are listed below. Project-wise details are shown

in detail in Table 5.

1. 8.4GW projects are at an advanced stage of tendering and could get awarded

in FY14 itself.

2. 9.12GW projects have not been tendered but significant progress has been

made on pre-development activities. These are likely to get awarded in FY15.

No new private thermal BTG

order on the anvil over next 12

months

Onus to drive capex in next few

quarters lies on State and

Central power utilities


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

3. 12.2GW projects have to cover significant ground on land acquisition,

clearances or other issues and are likely to get awarded only by FY16.

4. Two 4GW UMPPs are on the PMs watch list for accelerated award by end

of Jan-2014, we find the timeline too aggressive. The empowered Group of

Ministers (eGoM) approved revised Case-II standard bidding guidelines are yet to

be endorsed by the Cabinet. RfQs from prospective bidders are expected to be

invited shortly. No new UMPPs have been awarded since Tilaiya to Reliance

Power in 2009. Two of the four UMPPs awarded so far have seen no construction

progress on the ground. The eGoM has mandated that bidders for UMPPs will

have to source equipment from domestic manufacturers- a move opposed by

private sector developers. Latter half of FY15 is the earliest that equipment for

the two UMPPs is likely to get ordered, in our assessment. If all works well,

FY15 could see an uptick in overall equipment awards for 17.1GW.

5. Large under development pipeline: Another 14.1GW under development

projects in our study are still quite nascent or face critical roadblocks and award

may not happen even in FY16, in our view.

6. ~4GW of Subciritical orders for BHEL: Of the 37.7GW equipment orders

likely to get awarded over FY14-16, only ~10% are subcritical configurations

(250MW, 500MW units). The likelihood of BHEL winning these orders is high,

given local private sector competition is mainly for supercritical BTG.

7. 9GW of NTPC/NLC projects: Of the 37.7GW equipment orders likely to get

awarded over FY14-16, 8.83GW are NTPC/NLC projects and the balance are

state government projects.

The chart below summarizes the conclusions on expected timeline of equipment

award for state/central thermal power projects.

Figure 1: Estimated GW award by Central and State government utilities over FY14E-16E


8.4

17.1

12.2

14.1

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0

FY14

FY15

FY16

Indefinite

GW

Note: FY15 estimate includes

assumption of equipment award

for 8GW UMPPs


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

S. No. Project Project status & view View on

equipmen

t award

timeline

Neyveli Lignite Corporation (NLC)

1 2x500MW Neyveli New

Thermal Power Station

With respect to ordering equipment for 2x500MW Neyveli New Thermal Power

Station (capital cost of Rs59.1bn) - as regards boiler package, short listing of bidders

on pre-qualification and techno-economic conditions has been completed and price

evaluation is in process. As regards TG package, price evaluation has been

completed and the order will be placed shortly - as confirmed by BHEL

management, they are L1. We estimate the size of TG order at Rs13bn.

FY14

2 3x660MW Ghatampur,

Neyveli Uttar Pradesh

Power Limited (51:49 JV of

NLC and UPRVUNL)

Government sanction, MoEF approval and land acquisition pending. Ministry of coal

has allocated Pachwara South coal block in Jharkhand state with a reserve of

279MMT for this project in early July-13. Tenders have been floated for the main

plant package viz. steam generator package and steam turbine package and for the

project consultancy. Estimated project cost is Rs143.75bn

FY15

3 250MW Bithnok Thermal

Power Station, Neyveli

Lignite Corporation

Proposal to set up a TPS of 250MW capacity with linked lignite mine of 2.25MTPA

capacity at Bithnok in Rajasthan, at an estimated cost of Rs22.98bn; land acquisition

through Govt. of Rajasthan and diversion of forest land is being pursued. Obtaining

environmental clearance from MoEF is in process. PPA has been signed with

DISCOMs.

FY16

4 3x660MW Phase-I Sirkali

Power Project in TN, NLC

NLC board has accorded in principle approval for setting up coal based power plant

with overall capacity of 4GW in two phases in Sirkali in the coastal district of

Nagapattinam in the State of TN. The estimated project cost for Phase-I of

3x660MW is Rs144.8bn. Govt. of TN has been requested to issue in principal

approval for land for this project. Ministry of coal has allocated Jilga-Barpali coal

block (396MMT) in the State of Chhattisgarh for the project (again in July-2013).

Issue of tenders for preparation of feasibility report and EIA/EMP report are in

process. Other preliminary project activities are in progress.

Indefinite

NTPC

5 2x660MW Tanda extension,

U.P. (only TG)

Boiler order already booked by BHEL in FY13 FY14

6 1x500MW Unchahar

expansion

Land is in possession at existing NTPC plant location. The probability of BHEL

winning the order is high.

FY14

7 2x800MW NTPC Darlipalli,

Orissa

Award held up due to non-availability of land from Orissa government. Of 1,274.9

acres private land needed for the main section of project, the state government has

issued possession certificate for 1,205.79 acres. Alienation proposals for 339.49

acres of government land are in different stages or processing. NTPC needs

1652acres for the plant. NTPC has secured coal linkage for this project in the form of

Dulanga block with a capacity to produce 7MTPA under command area of MCL and

Pakri Barwadih block in Bihars Hazaribagh district with 12.5MTPA capacity. The

Dulanga coal mine development needs 1,399.48 acres of land. This includes 464.15

acres of private land and 263.31 acres of government land with the rest 672.02

acres being categorized as forest land. Land is to be acquired under Coal Bearing

Areas (Acquisition & Development) Act, 1957 and notification under Section 11 (1)

has already been issued. Compensation for private land as per new land acquisition

law could prove time consuming and delay re-tendering.

FY15

8 3x660MW North Karanpura,

Jharkhand

CCI had cleared the project and decided against relocating the project sitting over

coal reserves in Feb-13 and coal linkage has been restored. The power plant will be

located in vicinity of Tandwa town in Chatra district of Jharkhand which will be its

first project in the state.

FY16

Maharashtra

9 1x660MW Bhusawal Unit 8

under replacement

As per MAHAGENCO management, the tender has been floated

(http://www.mahagenco.in/index.php/projects#ongoing-projects)

FY14


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]


equipmen

t award

timeline

10 1x660MW Nashik Unit 6

under replacement

The tender has not been floated FY15

Gujarat

11 1x800MW Wanakbori TPS

Unit 8

Land is in possession for extension project. As per GSECL, price bids had been

received, but not been opened in absence of MoEF clearance. There is risk of lapse

of validity period of the bid, which might require the bidders to extend the same.

FY15

12 2x800MW Dholera Power

Plant

Both land and MoEF clearance awaited. Tenders have not been floated. Indefinite

West Bengal

13 Sagardighi Thermal Power

Project , Phase III

Extension Unit (2 X 500

MW)

WBPDCL Board is planning to set up one 500 MW unit under its existing capability,

which is included in the 12th five year plan.

FY15

14 Santaldih Thermal Power

Project , Phase III

Extension Unit 7 & 8 (2 X

500 MW)

It is planned to set up two 500 MW units in Santaldih. Initially, the process of starting

one 500 MW unit is under operation.

FY16

15 Bakreswar Thermal Power

Project, Phase III

Extension Unit 6 (1 X 500

MW)

This new project is planned to be set up under the existing capacity of Bakreswar

Thermal Power Project. WBPDCL hopes this process to start within the 12th five

year plan.

FY16

Tamil Nadu

16 1x660MW Ennore

Expansion TPS

Expansion within existing premises, land in place. Environmental Clearance

received from MoEF / New Delhi for 660MW on 24.01.2013. Consent to Establish for

the same has also been received from TNPCB on 18.02.2013. Tender for

International, Competitive bidding on EPC basis opened on 15.03.2013 and is under

scrutiny.

FY14

17 2x660MW Ennore SEZ TPS,

Vayalur

The filled up area of 500 acres of existing Ash dyke of the NCTPS in Vayalur village

has been proposed for setting up the Plant and hence there is no land acquisition

and R&R issues. Thus there is reuse of valuable resource viz. land. The project has

been proposed with imported coal. The final environment clearance is awaited from

MoEF/GoI (in our assessment final EC may not be a issue). Tender for the Project

floated on 12.4.13. Due date for submission of bid (2X660 MW) revised to

26.07.2013.

FY14

18 2x660 MW Udangudi

Supercritical Thermal

Power Project

EC from MoEF is awaited. TANGEDCO is executing the 2 X 660 MW project with

100% imported coal. GoTN has alienated 305 Ha of land in the name of TNEB and

acquisition of 114Ha of private lands are being processed by the special revenue

unit established for this project works. The District Collector, Thoothukudi has

granted enter upon permission for the 114Ha. Private lands. Global Tender has

been floated for Executing the project under EPC cum Debt Financing contract in

single package excluding coal jetty and pipe conveyor. Technical bids have been

opened on 19.07.2013 and tender evaluation is under process.

FY15

19 1x800MW Tuticorin TPS The Expert Appraisal committee of MoEF considered this project in the meeting held

on 03.09.2012 and directed TANGEDCO to identify alternate site on environmental

angle. However, the MoEF / GOI has been requested to reconsider the project by

TANGEDCO.

Indefinite

20 1x660MW Ennore TPS

Replacement Power

Project

TANGEDCOs land is readily available; there will be no R&R issues. The Board has

approved to change the capacity of the unit from 600 MW sub critical unit to the 660

MW Super critical unit in the meeting held on 28.1.12. Govt. approval for enhancing

the capacity to 660 MW received on 30.03.2012. The pre feasibility report has

FY16


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]


equipmen

t award

timeline

been finalized.

21 4000MW Cheyyur UMPP Site identified in Cheyyur in Kancheepuram District for setting up the UMPP. The

project will be based on imported coal to be arranged by the selected bidder. The

site for the captive jetty has been identified in Chinna Panaiyur village. M/s. PFC

Consulting Ltd., which is the Nodal agency for executing the UMPP, has formed a

Special Purpose Vehicle, viz., M/s. Coastal Tamil Nadu Power Ltd (CTNPL) for

implementing the Project. TANGEDCO will get an allocation of 1600 MW from this

project as its share. The TOR for the Plant area finalized on 31.1.2009. GOTN

issued administrative sanction for acquisition of Plant area on The TOR for the Jetty

area finalized on 21.12.2009. Public Hearing for the Project held on 10.6.2010.

GOTN issued administrative sanction for acquisition of Jetty area on 23.12.2010.

Public hearing for the captive port was held on 28.12.2011. The application for

Defense Clearance filed with MOD on 31.01.2012. Meeting of Expert Appraisal

Committee for CRZ held on The Expert Appraisal Committee on Thermal Power

Project / MOEF met on 04.12.2012, 06.02.2013, 22.04.2013 & 20.05.2013 and

finally decided to recommend the project for Environmental Clearance. Notification

3(2) for acquisition of plant area & port area has been issued. M/s. CTNPL will float

Request for Qualification documents shortly.

Overall our sense is that actual land acquisition for the project will have to be

undertaken post award. Going by protests in the past, bidders may be cautious

(http://newindianexpress.com/states/tamil_nadu/Green-norms-flouted-for-4K-MW-

Cheyyur-Plant/2013/08/22/article1745600.ece). Award of Case-II project may be

accelerated as the project falls under PMs wish list. The equipment award process

via competitive bidding excluding Chinese participation will be positive for domestic

equipment suppliers

FY15

Madhya Pradesh

22 2x660MW Shri Singaji TPP

(Stage-II), Dist. Khandwa,

MP

Water allocation and land is available. Administrative approval has been accorded

by GoMP on 07.01.2011. Mega power project status granted in Jul-12. GoI has

allocated Gondbahera Ujjaini coal block having 532 MT reserve to MPPGCL in their

meeting on 07.06.13. MoEF clearance awaited but could get accelerated post

allocation of coal block. PPA signed with MP Trade co on 4th January 2011.

Technical & Commercial bids have been evaluated and price bids are proposed to

be opened on 05-08-13 (status as on end Jul-2013). (Source:

http://www.mppgenco.nic.in/SSTPP-STAGE-II.pdf)

FY14

23 660MW Sarni Betul, at

Satpura TPS, MP

Estimated cost of Rs45bn. DPR ready. The existing and old units of 5x62.5MW are

to be dismantled and the land is to be used to construct the 660MW plant. Coal to be

sourced from recently allocated Gondbahera Ujjaini block.

FY16

24 2x800MW Dada Dhuniwale

Thermal Power Project,

Dist. Khandwa, MP

JVC of MPPGCL and BHEL incorporated on 25.02.10. Land acquisition and

environmental clearance is in progress. No coal block was allocated to the project.

BHEL has however requested Energy Department of GoMP to consider the project

for allocation of coal from the Coal Block allocated to MPPGCL. Estimated project

cost of Rs105bn. The JV equity structure plan is BHEL (26%), MPPGCL (10%),

Strategic investor (48%), and PSU entities (16%). Neither the strategic investor nor

the PSU entities have been finalized since incorporation of JV.

Indefinite

Chhattisgarh

In Chhattishgarh, the centre has allotted Baisi block with a reserve of 150MMT for the Chhattisgarh

State Power Generation Company for the proposed Korba South Thermal Power Station

(1000MW) and proposed Banji Bundeli (district Korea) power project (500MW).


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]


equipmen

t award

timeline

25 2x500MW Korba South

TPS, Korba, MP

The tender has not yet been floated, this is another old proposal. Recent coal block

allocation is the only update.

FY16

26 2x250MW Banji Bundeli,

Korea, MP

In October 2010 CSPGCL noted that tenders had been called for a detailed project

report on the proposal. No fresh status update is available. Recent coal block

allocation is the only update.

FY16

27 2x660MW IFFCO Sarguja,

Chhattisgarh

IFFCO in joint venture with Chhattisgarh State Electricity Board (CSEB) plans to set

up 2x660 MW coal based power plant at Prem Nagar in Surguja district of

Chhattisgarh. In March 2012, pre qualification bids were invited for EPC contract.

The project has been stuck for several years since conceptualization in 2005

(http://www.downtoearth.org.in/content/coal-country-politics-surguja-people-

forsaken-fine-print). We see significant environmental and land acquisition issues

delaying award of equipment or on-ground progress on the project.

Indefinite

Orissa

28 3x800MW, Dhenkanal,

Orissa

Orissa has been allotted the Tentuloi Block with a reserve of 1,234MMT for the

Odisha Thermal Power Corporation Ltd for a 3x800MW proposed thermal project at

Dhenkanal. However, as per Sep 4 article in Business Standard

(http://www.business-standard.com/article/economy-policy/odisha-seeks-alternate-

coal-block-for-otpcl-113090400844_1.html) the state government has asked for an

alternate coal block from coal ministry. As Tentuloi is an underground block the fear

is that higher coal extraction cost could push up power generation cost by 25%. The

~Rs100bn project needs 1,970 acres of land in all which includes 988 acres of

government land and 84 acres of forest land and 982 acres privately owned. OTPCL

is a 50:50 joint venture between Odisha Mining Corporation (OMC) and Odisha

Hydro Power Corporation (OHPC). Notification under section 6 (1) has been issued.

Entire power generated from the power plant will be procured by Gridco, the state

owned bulk power purchaser, as per the tariff determined through the bidding

process. Until the coal block issue is sorted out and land is acquired, we do not see

the equipment getting tendered.

Also as per The Power Times, the Orissa government may offload 74% stake in this

3x800MW project. The government has decided to adopt the UMPP model and

induct a strategic partner through competitive tariff bidding process for 25 years.

While the strategic partner is set to take over the management control of the power

project, OTPCL will retain 26% equity.

Indefinite

29 4000MW Bedabahal UMPP RFP for the UMPP is likely to be issued soon. The project is being monitored for

award by Jan-14 by PMs office. As per ET, cost of land has been deposited with the

state government and section 11 for award of land has been issued. Three coal

blocks - Meenakshi, Meenakshi-B and dip side of Meenakshi have been allocated

for the project and water linkage is available from Hirakud reservoir. The room for

securing funding by private sector for fresh UMPPs is limited, in our view.

FY15

Andhra Pradesh

Andhra Pradesh has been has been allotted 701MMT of reserves through the coal block - Sarapal

Nuapara for Andhra Pradesh Power Generation Corporation. The coal will be for Dr NTTPS Stage

V (800MW) at Ibrahimpatnam in Vijayawada, KTPS Stage VII (800MW) at Paloncha in

Kothagudem, KTPP Stage III (800MW), Sattupally TPS (600MW) and Srikakulam Thermal Power

Plant (3x800MW).

30 Vijayawada (800MW),

Kothagudem (800MW) and

Krishnapatnam (800MW)

As per APGENCO management, all these projects are planned to be awarded on

turnkey EPS basis. However in present scenario of AP given standoff on Telangana,

none of these may be awarded this fiscal. For Vijayawada, Kothagudem and

FY14 (2/3

800MW

units)

10


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]


equipmen

t award

timeline

Krishnapatnam 800MW units, the EPC specifications are under preparation (DPR is

ready) and the tender has not yet been floated. Land for these three plants is in

possession.

FY15 (1/3

800MW

units)

31 600MW Satupalli It is still at DPR stage although land has been acquired. FY16

32 3x800MW Srikakulam It is also at DPR stage, land is earmarked but not acquired. We recall that this is the

same area where NCCs 1320MW project was shelved owing to land acquisition

issues.

Indefinite

Rajasthan

The coal ministry has also allocated the Kente Extension block with a reserve of 200MMT to a host

of power plants in Rajasthan. The plants are Suratgarh TPP (2,640MW), Chhabra TPP (1,320 mw),

Banswara TPP (1,320MW), and Kalisindh TPP (1,320MW). 1320MW each at Suratgarh and

Chhabra has already been awarded to BHEL and L&T respectively on 28th Mar 2013.

33 2x660MW Surathgarh TPP

Unit 9 & 10

Land acquired. Tenders yet to be floated. FY16

34 2x660MW Kalisindh TPP St.

II Unit 3 & 4

Land acquired for unit -1 & 2 is sufficient for the project except for small quantity of

Land. Tenders yet to be floated

FY16

35 2x660MW Banswara TPP

Unit I & II

Section 9 Notification for 588.20 Acre land in Phephar village of Banswara for the

project issued. There is no rail link between Ratlam Banswara at present. Railway

has announced to take up the Ratlam Dungarpur via Banswara broad gauge line

in Railway Budget 2011-12; 50% amounting to approx. Rs12bn for the railway line &

land acquisition for railway line is to be borne by Govt of Rajasthan; Rs2bn provided

by RVUN in March 2011 as advance

Indefinite

Uttar Pradesh

36 1x660MW Hardauganj This is the long pending project plan which has been getting state government push

(CM had written to PM last year asking for coal linkage) and likely to benefit from

recent allocation of coal block to UPRVUNL. Land is available at existing operating

plant. Environmental clearance is pending.

FY15

37 2x660MW Obra-C Details of UPRVUNLs future projects is available at

http://www.uprvunl.org/pdf/ppmm/New%20Projects.pdf. Environmental clearance is

pending.

FY16

Haryana

38 1x660MW Yamunanagar

expansion

1x660MW additional supercritical thermal power unit at Yamuna Nagar as an

extension of 2x300MW Yamunanagar

Indefinite

Karnataka

39 1x800MW Edlapur JV project of KPCL 50%, BHEL 26% and IFCI 24%. The LOA for 1x800MW Edlapur

project valuing Rs31bn has also been settled and Notice to Proceed would be

issued after MOEF clearance.

FY15

40 2x800MW (+800MW)

Godhna, Chhattisgarh

Joint venture partnership agreement with L & T was signed on 24.02.2010.

Significant progress has been made on land acquisition. Final MoEF clearance is

pending. This is a future prospective large order for L&T

FY16

Source: J,P. Morgan, State Gencos, NTPC, NLC.

11


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Demand in the doldrums, no blue skies

Indias peak electricity demand supply deficit has fallen to an all-time low of 2.7%

(similar trend in energy deficit) in the month of August 2013. See chart below.

Figure 2: India's % peak power demand supply deficit

Source: CEA, J.P. Morgan.

This data point follows two consecutive months of yoy electricity demand decline in

India (during June and July-13) which we highlighted in a separate note last month

(India Power Sector: Demand in doldrums, 20 Aug 2013). Weak electricity demand

may cause developers to re-think fresh power plant capex and possibly defer

them. For a majority of states in India, if demand remains tepid, there is significant

risk of SEBs backing down on power procurement from generators. Weak demand is

a combined outcome of weak Industrial/GDP growth and poor SEB financials, in our

view. The coming months are likely to see a return in growth, though the pace is

questionable now and cannot be taken for granted.

In the table below we have illustrated the state wise distribution of MW awards

expected over FY14-16 and highlight the capacity which we feel is too nascent

(classified as "indefinite"). We conclude that ~20.3GW of the total 52GW

analyzed is in states where the peak demand deficit is less than 1% over Apr-

Aug-2013. These SEBs (highlighted in the table) may defer capex for new projects.

Also 9.32GW expected for award over FY14 and FY15 is in states which are

scheduled to go for assembly elections by Apr-May 2014. This could prove a cause

of delay in new ordering of large power plants by SEBs.

SEBs with weak financials particularly TN and UP may have to defer capex owing to

a shortfall in equity funds.

Other headwinds include:

1

3

5

7

9

11

13

15

17

19

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

Peak deficit Energy deficit

12


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Banks reluctance to go beyond sectoral lending limits for power which have

been achieved

New land acquisition bill could prolong delays

Past experience on pace of coal block development has been discouraging it

has taken over 8 years on average to commence coal production from

allotment date. CMPDI report on forest cover details, infrastructure details for

recently allocated coal blocks to PSUs/states (see Appendix I) is still not ready.

In our assessment, government generation companies may exercise caution

in going ahead with investments in generation project at early stage to avoid

getting stuck later owing to fuel availability constraints in future (around

15GW of the 52GW pipeline analyzed in this report are banking on coal

availability from recently allocated blocks).

Local competition no paper tiger

CEA's extension of an old advisory to State and Central utilities on sourcing

supercritical BTG from indigenous manufacturers, and eGoMs similar direction for

new UMPPs indeed brightens prospects for local BTG manufacturers including

BHEL.

BHEL has an operational installed capacity for manufacturing 20GW of power plant

equipment per annum. BHEL claims that it has achieved a high level of

indigenization of supercritical BTG, and has an edge over private sector competitors

in India.

We revisited progress on manufacturing facilities of local competition. We find the

progress quite credible. To conclude ~32GW Boiler and ~35GW of Turbine-

Generator (TG) manufacturing capacity is either operational or in an advanced

stage of set-up.

Figure 3: Credible indigenous BTG manufacturing capacity

Source: J.P. Morgan. Note: [1] We have assumed a haircut over BGR-Energys original plan to set up 5GW BTG manufacturing capacity.

Details of our study on BHELs local competition are detailed below.

L&T-MHI

LMB is a joint venture between L&T and Mitsubishi Heavy Industries, Japan

incorporated in India for the engineering, design, manufacture, erection and

20

4

0 02.2 3 3

20

43

5

0 0

3

0

5

10

15

20

25

BHEL L&T MHI Toshiba-JSW Alstom-Bharat Forge Doosan Power

Systems India

Thermax B&W BGR Hitachi [1]

Boiler Turbine

13


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

commissioning of super critical boilers in India. L&T has a 51% stake in the joint

venture. The manufacturing hub of LMB is at Hazira, Gujarat while it has established

design and engineering centers at Faridabad & Chennai. The total installed capacity

of 4,000 MW for manufacture of boilers. As per its FY13 annual report, L&T is at

an advanced stage of executing its various orders and is confident of meeting the

market requirements with focused efforts to manufacture/deliver the products to

become more cost competitive in the coming years. They are making efforts to

introduce advance ultra-supercritical Steam Generators for the Indian market

to remain ahead of competition.

LMTG is a joint venture between L&T and Mitsubishi Group, Japan comprising of

MHI and Mitsubishi Electric Corp (MELCO). It is engaged in the engineering,

design, manufacture, erection and commissioning of super critical turbines and

generators in India. L&T has a 51% stake in the joint venture. Their manufacturing

facility is at Hazira, Gujarat for manufacture of STG equipment of capacity

ranging from 500 MW to 1000MW (4GW annual capacity). As per L&T annual

report, the competition has further intensified with many international players

setting up or in the process of setting up manufacturing facility in India and

competing intensely for the few orders that are being tendered. The aggressive

pricing and delivery terms from competitors has put severe pressure on the

prices.

Toshiba-JSW

Toshiba JSW has been incorporated as a Joint Venture (JV) with a shareholding of

75% by Toshiba Corporation Limited, Japan (Toshiba) and 25% by JSW Group

(JSW Energy 22.46% and JSW Steel 2.54%) to design, manufacture, market and

maintain services of large-sized Supercritical Steam Turbines & Generators of size

500 MW to 1000 MW. The technology transfer agreement was signed between

Toshiba and Toshiba JSW for transferring supercritical turbine manufacturing

technology. The manufacturing facility of Toshiba JSW has been established

and production activity commenced (the factory in TN was inaugurated by state

CM in Feb-2012) for supply of 3 x 800 MW Supercritical Turbine and Generators

sets for Kudgi Power plant (contract value Rs23bn), Karnataka and 2 X 660 MW

Supercritical Turbine and Generator sets for Meja Power Project (contract value

USD315mn), Uttar Pradesh under the orders bagged from NTPC Limited.

Toshiba India Private Limited in Gurgaon undertakes overall project management;

Toshiba Plant Systems & Services Corporation (TPSC) India in Hyderabad carries

out installation and commissioning, while Toshiba JSW manufactures steam turbines

and generators. Toshiba has already supplied 5X830MW supercritical steam turbines

and generators for TPWRs Mundra UMPP and will supply two 660MW

supercritical steam turbines and generators for the Salaya-II Thermal Power Plant

operated by Essar Power Gujarat Limited. The latest qualification norms require

the domestic bidder to own a minimum 26% in the JV company for eligibility to

bid for supercritical tenders from State/Central governments, JSW Group may

have to increase stake in JV by 1% from 25% currently.

Alstom-Bharat Forge

Alstom Bharat Forge Power Ltd. is a joint venture between Alstom and Bharat Forge

Ltd, created to participate in the Indian market of turbines islands (steam turbines and

generators, heat exchangers and all associated equipment). Alstom has a majority

14


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

stake in this joint venture. The main orders for machine tools for this manufacturing

facility have already been placed and the construction is ongoing. The JV

manufactures 300-800MW subcritical and supercritical equipment with an annual

capacity of 5000 MW. Key orders include 3x660MW Nabinagar (JV of NTPC and

Bihar SEB) for Rs22.5bn booked in Feb-13 and 2x660MW NTPC Solapur

(Rs15.7bn). The JV aims to start production from its alternate site in Sanand,

Gujarat by Feb 2015. ABFPL had decided to shift the project to an alternate site

after the original location, the Mundra special economic zone promoted by the Adani

Group, was denied environmental clearance. Both partners are investing around Rs

18bn in the plant. Alstom and Bharat Forge have two joint ventures. While ABFPL

will manufacture supercritical turbines and generators, Kalyani Alstom Power Ltd

will make ancillary equipment such as heaters used with turbines and generators. As

per management, all machinery for the Sanand plant has been ordered. They claim to

be fully compliant with NTPCs phased manufacturing program.

Doosan Power Systems India

Doosan Chennai Works, a local subsidiary of Doosan Heavy Industries &

Construction won the letter of award to supply 3 boilers for Kudgi (3x800MW) in

Karnataka for NTPC in Feb-12, and 2 boilers for Lara (2x800MW) in Chhattisgarh in

Dec-12.

Doosan strategically took over the Indian boiler maker AE&E Chennai Works in

January-12, and has been implementing localized marketing and sales operation.

Before its attempts to localize, Doosan has won boiler orders for a string of projects

in India, including the Sipat Thermal Power Plant (3x660MW) in 2004, the Mundra

Thermal Power Plant in 2008, and GMRs Raipur Chhattisgarh (2x660MW) plant in

2010.

As per CY12 Annual brochure of Doosan- Our power-related business in India has

become important, and every effort is now being made to bolster our presence in this

so-called second home market. Therefore our four Indian subsidiaries, which

include Chennai Works, were merged in a single entity called Doosan Power

Systems India. Following a localization strategy, DPSIs competencies are being

strengthened in the production of supercritical boiler pressure parts, engineering

design, project management, procurement, construction work, and process/ quality

control. The goal is to maximize growth and profitability by securing

competitiveness in the Indian market over the mid-/long term.

The local supercritical manufacturing capacity was slated to be 2.2GW per annum in

2013 (as per Doosans Apr-2012 presentation).

Thermax Babcock & Wilcox Energy Solutions Private Limited

As per Thermaxs FY13 annual report, during the year, the company has

successfully transferred the technology from Babcock & Wilcox, the JV partner

(Thermax owns 51% in the JV, B&W 49%), for 660 MW and 800 MW in the

supercritical range. Indigenization of the technology including critical components

conforming to Babcock & Wilcox standards has been completed. The

manufacturing plant construction at Shirwal, Satara (Maharashtra) is nearing

completion. The Shirwal plant has already received Indian Boiler Regulation (IBR)

approval and its products will be built in accordance with the Boiler and Pressure

15


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Vessel Code of the American Society of Mechanical Engineers (ASME). The JV is

yet to book its first order.

The company does not expect a quick reversal of the market conditions that are

troubling the power equipment sector in the country weak financial position of

the generation companies, banks reluctance to go beyond sectoral lending limits,

non availability of coal, and non passage of land acquisition bill by the Parliament

and so on. It is preparing to address the limited number of active contract finalization

expected in the forthcoming year (i.e. FY14). The 3GW facility is located 50kms

away from Pune in Maharashtra.

BGR Energy Systems-Hitachi

The JV expects to commission boiler factory in 1QCY14 and TG six months

after that as per their Aug-13 conference call. Despite the Hitachi-MHI merger,

BGR is continuing normal business with Hitachi, as per management. Total capex

may be scaled down from Rs30bn, their original target was to set up 5GW BTG

manufacturing capacity in TN.

Amongst the prospective new entrants in the BTG market, Cethar Vessels (pegged to

have annual capacity of 8GW) has not made material progress.

16


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Pressure on fundamentals persists

There are near and present concerns regarding quality of current order backlog

especially private sector jobs owing to weak financials of customers and project

clearance issues. This, along with declining order backlog (and book-bill), is

resulting in execution de-growth. Capacity under utilization is taking a toll on

margins. Based on our deep dive into power plant capex to assess prospective orders,

weak electricity demand/trough energy deficit, and large scale of local competing

capacities, we do not expect BHEL to bag more than Rs310bn of orders in FY14 and

over Rs350bn in the medium term. While turnkey EPC orders can boost volumes, a

higher proportion of these can depress margins further. Keeping book-bill relatively

stable in our assumptions, the revenue growth afforded over FY14 and FY15 is a de-

growth of 15% and 4%, respectively. The PAT de-growth in current and next fiscal is

estimated at 44% and 9%, respectively. Our base case FY14 and FY15 EPS estimates

are 20% and 12% below consensus.

Figure 4: Order book, order inflow and book-bill trends

Rs. in bn, year-end March

Source: J.P. Morgan estimates, Company data.

Figure 5: Revenue, EBITDA margin and PAT growth

In % (EBITDA margin on RHS)


Figure 6: Working capital days, RoCE (%) and revenue growth (%)


Rise in LDs on declining revenue is a cause of concern

Liquidated damages charged off in P&L increased from Rs0.74bn to Rs3.48bn in

FY13 (included under other expenses of manufacture, administration, selling and

distribution). Claims for liquidated damages against the company are recognized in

accounts based on managements assessment of the probable outcome with reference

to the available information supplemented by experience of similar transactions.

100

300

500

700

900

1,100

1,300

1,500

1,700

2.00

2.50

3.00

3.50

4.00

4.50

FY11 FY12 FY13 FY14E FY15E

OB (RsB) OI (RsB) Book to Bill (x)

-

5.0

10.0

15.0

20.0

25.0

(60.0)

(40.0)

(20.0)

-

20.0

40.0

60.0

80.0

100.0

FY10 FY11 FY12 FY13 FY14E FY15E

Revenue Growth PAT Growth EBITDA Margin

50

75

100

125

150

-20%

-10%

0%

10%

20%

30%

40%

50%


Wcap Days RoCE Revenue Growth

17


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

The quantum of liquidated damages under contingent liabilities increased ~48% YoY

in FY13 to Rs33.76bn. Of this amount Rs20.04bn (up 27% YoY) was the amount

deducted by customers towards LD. As per annual report in view of the various court

cases and litigations and claims disputed by the company financial impact as to

outflow of resources in relation to contingent liabilities is not ascertainable at this

stage.

On Sep 6 (Friday) at the AGM of Neyveli Lignite Corporation management said that

they have claimed Rs1.5bn in liquidated damages from BHEL for technical

problems/delays in commissioning of 2x250MW CFBC based units. (Source:

Business Standard; http://www.thehindubusinessline.com/companies/nlc-wants-rs-

150-cr-from-bhel-for-project-delay/article5101334.ece).

18


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Valuation and key upside risks

We reiterate our UW rating and would use the 26% rally over the last one month to

sell BHEL stock. The stock is trading at 10.5x FY15E P/E, cheap in the context of

valuations post 2005 (boom in power capex with private sector joining the party) but

above valuations seen prior to that. Average OPM (ex-provisions) over FY93 to

FY04 averaged around 10.7%, well below peak margins of 20.6%. In FY00 and

FY01 had seen two consecutive years of revenue de-growth which coincided with

weak valuations.

Figure 7: BHEL: One-year forward P/E


Our Sep-14 PT of Rs110 (unchanged) implies terminal sales of Rs355bn, followed

by zero terminal growth. We expect EBITDA margins to settle at ~11% in a weak

demand environment and amid competitive pressures. We do not expect working

capital pressures to worsen cash flow position further, as revenue continues to de-

grow through FY18 in our base-case assumptions.

Valuations can remain cheap in the absence of improvement in ordering

environment. A return to Rs400bn+ inflow run-rate is a risk to our medium-term

growth and margin assumptions. Other upside risks include fresh private sector coal

block allocation, faster clearances and award of projects/UMPPs despite elections is

an upside risk, BHELs ability to cushion margin fall by reigning in employee costs,

order inflow surprise from nuclear/defense/railways.

Table 1: BHEL: Implied Valuation at PT of Rs110

(x), year end March

FY12 FY13 FY14E FY15E

P/E 3.8 4.1 7.3 8.0

P/B 1.1 0.9 0.8 0.8

EV/EBITDA 2.1 2.2 3.2 3.0


9.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

19


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Table 2: BHEL: Discounted Cash Flows

Rs. in millions, year-end March

FY12 FY013 FY14E FY15E FY16E FY17E FY18E FY19E FY20E

Assumptions (%)

Revenue growth 21.7 0.8 (15.0) (4.0) (4.0) (3.0) (2.0) 0.0 0.0

EBITDA margin 20.6 19.4 13.4 12.5 12.0 11.0 11.0 11.0 11.0

EBIT* (1-tax rate) growth (4.7) (49.3) (15.2) (10.0) (13.6) (2.0) 0.0 0.0

Tax rate (%) 31.7 29.9 33.9 34.2 33.0 33.0 33.0 33.0 33.0

Depreciation growth 19.2 7.0 8.6 (4.0) (3.0) (2.0) 0.0 0.0

FCF growth (%) 131.9 15.6 5.7 (18.3) (12.3) (2.0) 0.0 0.0

Capex / sales 2.7 1.9 2.5 1.9 2.0 2.0 2.0 2.0 2.0

Change in working capital as % of sales (9.8) (7.1) (0.0) 0.7 0.0 0.0 0.0 0.0 0.0

ROCE 23.1 18.7 8.3 6.7

Net Revenue 472,279 476,177 404,952 388,837 373,283 362,085 354,843 354,843 354,843

EBIT * (1-tax rate) 62,102 59,160 29,965 25,419 22,887 19,774 19,379 19,379 19,379

Depreciation & Amortization 8,000 9,534 10,200 11,077 10,634 10,315 10,109 10,109 10,109

Change in net working capital (46,110) (33,608) (13) 2,890 0 0 0 0 0

Capital expenditure (12,746) (9,003) (10,000) (7,500) (7,466) (7,242) (7,097) (7,097) (7,097)

Free cash flows 11,246 26,082 30,153 31,886 26,056 22,848 22,391 22,391 22,391

FCF: Now 13,386 27,644 28,458 26,789 19,492 15,220 13,282 11,823 10,528

FCF: 1-yr forward 0 31,045 31,959 30,094 21,890 17,092 14,916 13,282 11,823

Fiscal Year end Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21

Cash Flow Starting Date Sep-14 Sep-14 Sep-14 Sep-14 Sep-14 Sep-14 Sep-14 Sep-14 Sep-14

Days left (548) (183) 182 548 913 1,278 1,643 2,009 2,374

Years left (1.5) (0.5) 0.5 2 3 4 5 6 7

Discount factor at WACC 1.19 1.06 0.94 0.84 0.75 0.67 0.59 0.53 0.47


Table 3: BHEL: DCF- based valuation

Rs. in millions

One-year forward DCF calculation Sep-14 WACC Assumptions

NPV of cash flows (2014-2020E) 109,097 Cost of equity = 16.9%

Terminal growth (%) 0.0% Cost of debt = 11.0%

Implied 2020E terminal FCF exit multiple (x) 8.1 Tax = 30.0%

PV of terminal value 96,102 Risk free rate = 8.4%

Enterprise Value (EV) 205,199 Beta = 1.22

Terminal value as % of EV 47 Equity risk premium = 7.0%

FY13 net debt/(cash) (63,169) Required equity market return = 15.4%

Equity value (Rs mn) 268,367 Debt/capital = 50.0%

Equity value (US$ mn) 4,193 Equity/capital = 50.0%

Number of shares (mn) 2,447.6

Equity value (Rs/share) 110 WACC = 12.3%


20


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Key financials

Table 1: BHEL: Standalone P&L summary

Rs. in billions, year-end March


Order Inflow 605.1 221.0 315.3 310.9 341.0

% YoY 2.5 (63.5) 42.7 (1.4) 9.7

Power 463.9 140.1 254.4 250.0 270.0

% YoY 10.5 (69.8) 81.5 (1.7) 8.0

Industry + Overseas 141.1 80.8 60.9 60.9 71.0

% YoY (17.2) (42.7) (24.7) 0.0 16.6

Order backlog 1,641.5 1,353.0 1,151.8 1,036.2 967.6

% YoY 14.2 (17.6) (14.9) (10.0) (6.6)

Power 1,313.2 1,060.0 933.0 842.6 792.7

% YoY 26.5 (19.3) (12.0) (9.7) (5.9)


% YoY (17.8) (10.7) (25.3) (11.6) (9.6)

Gross revenue 433.4 495.1 501.6 426.5 409.6

% YoY 26.9 14.2 1.3 (15.0) (4.0)

Power 347.9 378.6 395.8 340.4 319.9

% YoY 28.5 8.8 4.5 (14.0) (6.0)


% YoY 20.8 36.3 (9.2) (18.5) 4.0

Book-bill 3.79 2.73 2.30 2.43 2.36

Power 3.77 2.80 2.36 2.48 2.48


P&L

Net Sales 388.1 472.3 476.2 405.0 388.8

Other op income 9.2 7.5 8.1 8.5 8.9

(Inc)/Dec in WIP 1.3 8.2 (1.2) (1.2) (1.2)

Raw material consumption (226.7) (282.4) (272.4) (240.0) (234.5)

Staff cost (56.5) (54.7) (57.5) (61.0) (64.6)

Other expenses (35.0) (52.1) (59.3) (55.8) (47.7)

Total Expenditure (317.0) (380.9) (390.4) (357.9) (348.0)

EBIDTA 80.3 98.9 93.9 55.5 49.7

Other income 6.4 12.7 11.2 12.2 14.1

EBIDT 86.7 111.5 105.1 67.8 63.8

Interest (0.5) (0.5) (1.3) (1.7) (1.7)

Depreciation (5.9) (8.0) (9.5) (10.2) (11.1)

PBT 80.2 103.0 94.3 55.9 51.1

Adjusted PBT 80.2 103.0 94.3 55.9 51.1

Tax (26.7) (32.6) (28.2) (18.9) (17.5)

PAT 53.5 70.4 66.1 36.9 33.6

EPS 21.9 28.8 27.0 15.1 13.7

Growth (%)

Net Sales 18.0 21.7 0.8 -15.0 -4.0

Reported PBT growth 32.4 28.4 -8.4 -40.8 -8.6

Adjusted PBT growth -83.8 28.4 -8.4 -40.8 -8.6

PAT 12.8 31.5 -6.0 -44.2 -9.1

Key ratios (%)

Raw Material to Sales 58.1 58.1 57.4 59.5 60.6

Excise duty to sales 4.4 4.6 5.1 5.1 5.1

Staff Cost to sales 14.6 11.6 12.1 15.1 16.6

Other exp to sales 9.0 11.0 12.4 13.8 12.3

EBIDTA margin 20.2 20.6 19.4 13.4 12.5

Effective tax rate 33.3 31.7 29.9 33.9 34.2

Source: Company reports and J.P. Morgan estimates.

21


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Table 4: BHEL: Standalone Balance Sheet


FY2011 FY2012 FY2013 FY2014E FY2015E

Share capital 4,895 4,895 4,895 4,895 4,895

Reserves & surplus 196,643 248,837 299,546 321,993 341,618

Shareholders funds 201,538 253,732 304,441 326,889 346,514

Total loan funds 1,021 1,234 14,152 14,152 14,152

Other long term liabilities 91,424 75,508 57,897 52,107 46,896

Long Term Provisions 49,232 50,057 59,329 62,296 65,410

Total Liabilities and Equity 343,216 380,531 435,819 455,443 472,972

Gross block 80,497 97,066 107,833 118,833 127,333

Less : Depreciation 46,486 54,135 63,281 73,481 84,559

Net block 34,011 42,932 44,551 45,351 42,774

Capital work in progress 17,338 13,476 11,716 10,716 9,716

Fixed assets 51,347 56,444 56,301 56,101 52,523

Long-term loans and advances 8,829 9,001 9,053 9,144 9,235

Other LT fixed assets 73,621 95,087 106,537 100,242 96,253

- Deferred Debts 68,107 81,948 98,596 93,489 89,768

- Other 5,514 13,139 7,941 6,753 6,484

Investments 4,392 4,617 4,292 4,292 4,292

Current assets

Inventories 108,521 134,445 117,638 113,037 117,844

Sundry debtors 201,035 263,361 292,345 269,361 254,217

- Deferred Debts 40,907 60,570 72,209 64,273 56,105

- Dispatched pending billing 17,171 17,171 17,052 17,052 17,052

- Valuation adjustment - 14,751 12,744 12,744 12,744

- Other 142,957 170,870 190,340 175,291 168,316

Cash & Bank Balances 96,302 66,720 77,321 104,337 133,232

Loans & advances 23,825 21,117 20,291 21,327 20,478

Others 3,096 1,506 2,000 2,200 2,420

Total current assets 432,779 487,149 509,595 510,262 528,190

Current liabilities 222,654 260,872 235,373 209,943 201,866

Sundry Creditors 80,954 102,713 96,752 86,867 85,837

- Advances (customers) 117,273 131,444 112,611 98,367 90,085

- Others Current Liabilities 24,426 26,715 26,010 24,709 25,945

Total Other Current Liabilities 141,700 158,159 138,621 123,076 116,029

Short Term Provisions 26,733 26,357 30,092 29,161 29,161

Taxation 1,422 1,461 1,367 1,367 1,367

Dividends 8,762 9,007 8,041 7,110 7,110

Others 16,549 15,889 20,685 20,685 20,685

Total current liabilities and provisions 249,387 287,229 265,466 239,104 231,028

Net current assets 183,392 199,920 244,129 271,158 297,162

Net current assets (ex-cash) 87,090 133,200 166,809 166,821 163,931

Deferred Tax Asset 21,636 15,462 15,507 14,507 13,507

Total Assets 343,216 380,531 435,819 455,443 472,972

Ratios :

Book value (Rs/share) 82 104 124 134 142

Debt / Equity (x) 0.0 0.0 0.0 0.0 0.0

Return on equity 33% 31% 24% 12% 10%

Return on capital employed (x) 47% 33% 30% 18% 14%

ROCE 29% 23% 19% 8% 7%

Current ratio (x) 1.7 1.7 1.9 2.1 2.3

Working Capital ex cash / Rs of sales (x) 0.20 0.27 0.33 0.39 0.40

Inventory (days) 120.8 126.0 110.8 115.8 120.8

Total assets turnover (x) 1.3 1.3 1.2 0.9 0.9

Loans & advances/ Sales (%) 6.2 4.8 4.5 5.0 5.0

Receivables

LT Deferred Debts / Sales (Days) 57 60 72 80 80

Other LT Debtors (Days) 5 10 6 6 6

Total ST Collection period (days) 169 194 213 230 227

ST Deferred Debts / Sales (Days) 34 45 53 55 50

Other ST Debtors (Days) 120 126 139 150 150

Average credit received (days) 90 96 91 89 88

Customer advances (%) of sales 27 27 22 23 22

Customer adv as % of average OB 7.6 8.8 9.0 9.0 9.0


22


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Table 5: BHEL: Standalone Cash Flows


FY2012 FY2013 FY2014E FY2015E

EBIT 97,588 104,551 60,091 42,463

D&A 8,000 9,534 10,200 11,077

Tax 32,623 28,177 18,921 17,467

Decrease in WC (46,110) (33,608) (13) 2,890

Provisions (14,026) (28,261) (23,457) (12,409)

Operating CF 12,637 24,039 27,900 26,555

Capex (12,746) (9,003) (10,000) (7,500)

Change in investments (225) 325 0 0

Investing CF (12,971) (8,678) (10,000) (7,500)

FCF (334) 15,361 17,900 19,055

Change in equity 0 0 0 0

Change in debt 213 12,918 0 0

Net Interest paid (513) (1,253) (1,698) (1,698)

Other income 20,166 19,287 20,715 23,019

Deferred tax asset 6,173 (45) 1,000 1,000

Dividend & div tax paid (18,210) (15,440) (14,282) (14,282)

Other LT Liability (15,092) (8,339) (2,823) (2,096)

Other LT Assets (21,637) (11,503) 6,205 3,898

Misc. adjustment (348) (386) 0 0

Financial CF (29,248) (4,760) 9,116 9,840

Change in cash (29,582) 10,601 27,017 28,894

Opening cash balance 96,302 66,720 77,321 104,337

Closing cash balance 66,720 77,321 104,337 133,232


23


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Appendix I: Recent coal block allocations

Sl. No Coal Block / Capacity /

Host State

Proposed Applicant

State/CPSU

Proposed Govt.

Company

Proposed allocated Coal

Reserves(MT)

1 Tentuloi/1234 MT/Odisha Odisha Odisha Thermal Power

Corporation Ltd.

(OTPCL)

1234

2 Bhalumuda/550

MT/Chhattisgarh

CPSU / NTPC NTPC Ltd. 550

3 Banai/629

MT/Chhattisgarh


4 Chandrabila/550

MT/Odisha


5 Kudanali-Luburi/396

MT/Odisha


Jammu & Kashmir Jammu & Kashmir

State Power Dev. Corp.

Ltd. (JKSPDCL)

130

6 Baisi/150 MT/Chhattisgarh Chhattisgarh Chhattisgarh State

Power Gen. Co. Ltd.

(CSPGCL)

150

7 Pachwara-South/279

MT/Jharkhand

CPSU / NLC Neyveli Uttar Pradesh

Power Ltd./Ghatampur

(NUPPL)

279

8 Jilga-Barpali/546

MT/Chhattisgarh

CPSU / NLC NLC / Sirkali (Tamil

Nadu)

396

Chhattisgarh Chhattisgarh State

Power Generation Co.

Ltd

150

9 Sarapal-Nuapara/701

MT/Odisha

Andhra Pradesh APGENCO 701

10 KenteExtn./200

MT/Chhattisgarh

Rajasthan Rajasthan Vidyut

Utpadan Nigam

(RVUNL)

200

11 Mahajanvadi/340

MT/Maharashtra

Maharashtra MAHAGENCO 170

Gujarat GSECL 170

12 GondbaheraUjheni/532

MT/Madhya Pradesh

Madhya Pradesh MPPGCL 532

13 Deocha-Pachami/2102

MT/West Bengal

Karnataka Karnataka Power Corp.

Ltd. (KPCL)

382

West Bengal The West Bengal

Power Dev. Corp

(WBPDCL).

584

Bihar BSPGCL

(Pirpainti/Lakhisarai)

SJVNLtd./ BUXAR

486

Punjab Punjab State Power

Corp. Ltd. (PSPCL)

229

Tamil Nadu Tamil Nadu Generation

& Dist. Corp Ltd.

(TANGNDCO)

171

Uttar Pradesh UPRVUNL 250

14 Kalyanpur-Badalpara/102

MT/ Jharkhand

Harayana HPGCL 51

UP UPRVUNL 51

Source: PIB, J.P. Morgan.

In early Jul-2013 Ministry of Coal

had allocated 14 coal blocks for

the power sector to government

companies and central PSUs.

These 14 blocks have a

geological reserve of 8,311MMT

capable of yielding ~159MTPA

adequate for 31.8GW. NTPC

(OW) has been allocated 4

blocks - 2 each in Chhattisgarh

and Orissa. NTPC's share of

tentative reserves is 1,995MMT.

Neyveli Lignite Corporation,

another central PSU has been

allocated 2 blocks with 675MMT

reserves. Other state power

generating companies which are

in the list of beneficiaries

include- Orissa, Chhattisgarh,

AP, Rajasthan, Maharashtra, MP,

Karnataka, WB, Bihar, Punjab,

TN, UP and Haryana.

24


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Bharat Heavy Electricals (BHEL): Summary of FinancialsIncome Statement Cash flow statement

Rs in millions, year end Mar FY12 FY13 FY14E FY15E Rs in millions, year end Mar FY12 FY13 FY14E FY15E

Revenues 472,279 476,177 404,952 388,837 EBIT 90,880 84,360 45,315 38,636

% change Y/Y 21.7% 0.8% (15.0%) (4.0%) Depreciation & Amortization 8,000 9,534 10,200 11,077

EBITDA 98,880 93,894 55,515 49,713 Change in working capital (46,110) (33,608) (13) 2,890

% change Y/Y 23.2% (5.0%) (40.9%) (10.5%) Taxes 32,623 28,177 18,921 17,467

EBITDA Margin 20.9% 19.7% 13.7% 12.8% Others (14,218) (28,261) (23,457) (12,409)

EBIT 90,880 84,360 45,315 38,636 Cash flow from operations 12,637 24,039 27,900 26,555

% change Y/Y 22.2% (7.2%) (46.3%) (14.7%) Capex (12,746) (9,003) (10,000) (7,500)

EBIT Margin 19.2% 17.7% 11.2% 9.9% Cash flow from Investments (225) 325 0 0

Other income 12,656 11,217 12,242 14,122 Free cash flow (334) 15,361 17,900 19,055

Net Interest (513) (1,253) (1,698) (1,698)

Earnings before tax 103,023 94,324 55,859 51,059 Equity raised/(repaid) 0 0 0 0

% change Y/Y 28.4% (8.4%) (40.8%) (8.6%) Debt raised/(repaid) 213 12,918 0 0

Tax (32,623) (28,177) (18,921) (17,467) Other (225) 325 0 0

as % of EBT 31.7% 29.9% 33.9% 34.2% Dividends paid (18,210) (15,440) (14,282) (14,282)

Adjusted Profit 70,400 66,147 36,938 33,592 Change in cash (29,582) 10,601 27,017 28,894

% change Y/Y 31.5% (6.0%) (44.2%) (9.1%) Beginning cash 96,302 66,720 77,321 104,337

Shares outstanding 2,448 2,448 2,448 2,448 Ending cash 66,720 77,321 104,337 133,232

EPS 28.76 27.03 15.09 13.72 DPS 6.40 5.41 5.00 5.00

% change Y/Y 31.5% (6.0%) (44.2%) (9.1%)

Balance sheet Ratio Analysis

Rs in millions, year end Mar FY12 FY13 FY14E FY15E Rs in millions, year end Mar FY12 FY13 FY14E FY15E

Cash and cash equivalents 66,720 77,321 104,337 133,232 EBITDA margin 20.9% 19.7% 13.7% 12.8%

Accounts receivable 263,361 292,345 269,361 254,217 EBIT margin 19.2% 17.7% 11.2% 9.9%

Inventories 134,445 117,638 113,037 117,844 Net profit margin 14.9% 13.9% 9.1% 8.6%

Others 22,623 22,291 23,527 22,898

Current assets 487,149 509,595 510,262 528,190

Sales growth 21.7% 0.8% (15.0%) (4.0%)

Total Investments 4,617 4,292 4,292 4,292 Net profit growth 31.5% (6.0%) (44.2%) (9.1%)

Net fixed assets 56,444 56,301 56,101 52,523 EPS growth 31.5% (6.0%) (44.2%) (9.1%)

Total Assets 667,760 701,285 694,547 704,000

Liabilities Debt to total capital 0.0 0.0 0.0 0.0

Payables 102,713 96,752 86,867 85,837 Net debt/Equity (25.8%) (20.7%) (27.6%) (34.4%)

Others 184,516 168,713 152,237 145,191 Sales/assets 0.7 0.7 0.6 0.6

Total current liabilities 287,229 265,466 239,104 231,028 Assets/equity 2.8 2.5 2.2 2.1

Total Debt 1,234 14,152 14,152 14,152 ROE (%) 30.9% 23.7% 11.7% 10.0%

Other liabilities 125,565 117,226 114,403 112,307 ROCE (%) 27.1% 20.6% 9.1% 7.2%

Total Liabilities 414,028 396,844 367,659 357,486

Shareholder's equity 253,732 304,441 326,889 346,514

BVPS 103.67 124.38 133.55 141.57


25


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

JPM Q-Profile

Bharat Heavy Electricals Limited (INDIA / Industrials)

As Of: 06-Sep-2013 [email protected]

Local Share Price Current: 126.80 12 Mth Forward EPS Current: 17.46

Earnings Yield (& local bond Yield) Current: 14% Implied Value Of Growth* Current: 0.06%

PE (1Yr Forward) Current: 7.3x Price/Book Value Current: 1.0x

ROE (Trailing) Current: 23.93 Dividend Yield (Trailing) Current: 3.15

Summary

Bharat Heavy Electricals Limited 4299.60 As Of:

INDIA 1.724051 SEDOL B6SNRV2 Local Price: 126.80

Industrials Electrical Equipment EPS: 17.46

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg

12mth Forward PE 7.26x 3.48 34.98 12.92 13.76 28.66 -1.13 -52% 382% 78% 90%

P/BV (Trailing) 1.02x 0.73 14.93 3.08 4.32 10.96 -2.31 -29% 1369% 203% 325%

Dividend Yield (Trailing) 3.15 0.39 3.42 1.16 1.49 3.07 -0.08 -87% 9% -63% -53%

ROE (Trailing) 23.93 8.42 33.58 23.93 21.58 38.48 4.68 -65% 40% 0% -10%

Implied Value of Growth 0.1% -0.82 0.78 0.32 0.25 1.01 -0.50 -139175% 132209% 54592% 42751%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)

6-Sep-13

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26


10 September 2013

Sumit Kishore

(91-22) 6157-3581

[email protected]

Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research

analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document

individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views

expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of

any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views

expressed by the research analyst(s) in this report.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Bharat Heavy Electricals (BHEL).

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Bharat Heavy Electricals (BHEL).

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Bharat Heavy Electricals (BHEL).

Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan

covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing

[email protected] with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams may

screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail

[email protected].

Date Rating Share Price

(Rs)

Price Target

(Rs)

26-Oct-08 OW 219.97 280.00

05-Apr-09 N 307.19 260.00

28-May-09 N 416.57 380.00

24-Jul-09 OW 442.13 490.00

25-Oct-09 OW 469.03 530.00

27-May-10 OW 459.27 540.00

26-Jul-10 OW 494.27 554.00

31-Oct-10 OW 489.11 556.00

29-Apr-11 OW 403.11 480.00

30-Jan-12 N 244.15 270.00

27-Jul-12 N 211.95 200.00

03-Sep-12 UW 213.25 185.00

30-Oct-12 UW 242.45 190.00

08-Jan-13 UW 239.80 195.00

03-Feb-13 UW 225.00 180.00

04-Aug-13 UW 120.80 145.00

27-Aug-13 UW 123.90 110.00

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire

period.

J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the

average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve

months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)

coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of

the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if

applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy

reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a

recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is

compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear

0

143

286

429

572

715

858

Price(Rs)

Oct

08

Jul

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Apr

10

Jan

11

Oct

11

Jul

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Apr

13

Bharat Heavy Electricals (BHEL) (BHEL.BO, BHEL IN) Price Chart

OW Rs490 OW Rs556 UW Rs190

N Rs380 OW Rs554 UW Rs185UW Rs180UW Rs110

OW Rs280N Rs260 OW Rs530 OW Rs540 OW Rs480 N Rs270 N Rs200UW Rs195 UW Rs145

Source: Bloomberg and J.P

Documents

JPM_Bharat_Heavy_Electri_2013-09-10_1208236