Bharat Heavy Electricals Ltd. - Business...

BHEL is the largest engineering enterprise in India manufacturing over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. In order to meet the increasing demand of power equipments it is currently expanding its capacities to 20,000 MW, which expected to commission by Dec 2011. The Company has order backlog of Rs 1.34 trn with visibility for next three and half years and we expect its margins to expand by 521 bps by FY12.

Robust order book with visibility for next three and half years BHEL has an order backlog of Rs. 1.34 trn. It has already won orders worth Rs. 369.5 bn during 9MFY10 and is well placed to win orders worth 180 bn in order to achieve its order intake target of Rs. 550 bn. Its current order book is 4.4x its trailing 12 months revenues giving it a visibility of next three and half years.

Capacity expansion to provide economies of scale BHEL has recently expanded its capacity from 10,000 MW to 15,000 MW which is expected to stabalize by March 2010. It is further expanding its capacities for power equipment manufacturing. It is in the process of adding additional 5,000 MW taking its total capacity to 20,000 MW. We expect that BHEL will be able to achieve economies of scale by spreading of fixed costs over higher volumes and through savings on outsourcing costs .

Supercritical projects to provide the next growth trigger Share of total Super Critical Sets is expected to be 43,640 MW (59% of Coal based sets) in 12th Plan and 64,000 MW (100% of Coal based sets) in 13th Plan. CEA’s policy paper has put forward guidelines which would encourage indigenous manufacturing in India and benefit companies like BHEL. BHEL has signed JV’s with state utilities to set up super critical power projects. These JV’s will in turn pass on the equipment order to BHEL.

BHEL proving its prowess in spite of competition from Chinese equipment A CEA panel has recently observed that the Chinese equipment was on par with the Indian equipment - quality wise. However, a recent cancelation of order placed with a Chinese manufacturer by Indiabulls and subsequent placement of the same order with BHEL has once again raised concerns on the quality of the Chinese equipment. BHEL has also claimed that its equipment performance has been consistently 2% higher than other available equipments & operating availability is also higher. Even though the initial capital cost of Chinese sets is lower, operating cost is higher than Indian sets resulting in over-all higher cost.

OUTLOOK & VALUATION BHEL is the largest manufacturer of power equipment in the country. The company has been expanding its capacities on back of the increased capacities coming up during the 11th and 12th Plan. Several super-critical orders are awaited to be released which is expected to provide further impetus to BHEL’s already robust order book. BHEL has also increased its order book from industry segment which could enable it to continue the pace of its growth in the future. We expect the sales of the company to grow at a CAGR of 24% in next three years. BHEL will be able to improve its margins by 521 bps by FY12. At CMP of Rs.2406 the stock is trading 23x FY11E EPS of Rs.105 & 18x FY12E EPS of Rs.137. Given its strong order book, strong balance sheet and proven track record of the management, BHEL is well poised to capture the upcoming opportunities in the Power sector in the country and thus we initiate coverage with an Accumulate rating on the Company with a target price of Rs.2767 (based on 20x its FY12E EPS of Rs.137).

Initiating Coverage

Bharat Heavy Electricals Ltd.

February 01 , 2010 ACCUMULATE MEDIUM RISK PRICE Rs.2406 TARGET Rs.2767

POWER

SHARE HOLDING (%)

Promoters 67.7

FII 15.6

FI / MF 10.8

Body Corporates 4.2

Public & Others 1.7

STOCK DATA

Reuters Code Bloomberg Code

BHEL.BO BHEL.IN

BSE Code NSE Symbol

500103 BHEL

Market Capitalization*

Rs. 1177.8 bn US$ 25.4 bn

Shares Outstanding*

489.5 mn

52 Weeks (H/L) Rs.2,550 /1,251

Avg. Daily Volume (6m)

123,423 Shares

Price Performance (%)

1 M 2M 3M

1 2 7

200 Days EMA: Rs. 2154

*On fully diluted equity shares

Part of Classic

Please refer to important disclosures at the end of the report For private Circulation Only.

Sushil Financial Services Private Limited Member : BSEL, SEBI Regn.No. INB/F010982338 | NSEIL, SEBI Regn.No.INB/F230607435. Office : 12, Homji Street, Fort, Mumbai 400 001. Phone: +91 22 40936000 Fax: +91 22 22665758 Email : [email protected]

KEY FINANCIALS Y/E Mar

Revenue (Rs mn)

APAT (Rs mn)

AEPS (Rs)

AEPS (% Ch.)

P/E (x)

ROCE (%)

ROE (%)

P/BV (x)

FY09 262123 31120 63.6 8.9 37.8 30.1 26.2 9.1

FY10E 322382 41106 84.0 32.1 28.7 33.1 28.4 7.4

FY11E 402977 51420 105.0 25.1 22.9 33.7 28.5 5.9

FY12E 503721 66882 136.6 30.1 17.6 35.0 29.3 4.6

ANALYST Viral Shah | +91 22 4093 5045 [email protected]

SALES: Devang Shah | +91 22 4093 6060/61

[email protected]

Nishit Shah | +91 22 4093 6074 [email protected]

mailto:[email protected]

mailto:[email protected]

February 01 , 2010

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Robust order book with visibility for next three and half years

BHEL has a robust order book which has grown at a CAGR of about 38% from Rs.236 bn in FY04 to Rs. 1170 bn in FY09. Its order book consists of mainly 3 segments viz. Power, Industry and Overseas. All the three segments have contributed to its overall growth in past, with highest growth derived from Power segment. Power segment has grown at a CAGR of 30% followed by Industry segment which has grown at a CAGR of 23.5% in past five years.

Source: Company

Despite the slowdown in the Indian economy during 2007-08 to 2008-09 BHEL was able to achieve a growth in the order intake of 18.7% during the same period, which clearly highlighted the intention of the Government on increasing the power capacity and generation in the country. As of H1FY10, BHEL had an order book intake of Rs. 208.2 bn which comprised 63% of orders contributed by Power, 33% of orders coming from Industry and 5% from Overseas. Post H1FY10, BHEL has won additional order worth ~ Rs.160 bn and as of 9MFY10 BHEL’s order intake stands at Rs.369.5 bn Of these 94% of the orders are from the Private sector (independent power producers) as against just 22% as on FY09. As of date the order backlog stands at Rs.1.34 trn.

Source: Company

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Orders booked Orderbacklog Orderbacklog/sales

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Order book intake break up 9M FY10

Power Industry Overseas

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We believe that this is a positive move by BHEL, as most of the orders during the 12th five year plan would be coming from private players. BHEL has guided for an order book intake of Rs. 550 bn by end of FY10. We believe that since it has achieved an order intake of Rs.350 bn for 9MFY10 it can achieve the balance Rs. 180 bn worth of orders on back of the supercritical power projects which are awaited to be released soon. BHEL has an order book to bill ratio of 4.4x on a trailing twelve month basis. Going forward BHEL’s order book accretion would happen mainly from supercritical orders, 11 bulk orders expected from NTPC and Power generation JVs signed by BHEL with state utilities (which would place equipment orders with BHEL). We believe that orders worth Rs. 621.3 bn will be booked in FY11E and orders worth Rs.640.7 bn will be booked in FY12E.

Description MW Sector Order Value

Rs.mn

Power Engineers Contracting Company 42 Power 910

IOC 20 Power 1050

Chennai Petroleum 20 Power 1700

Oil India 20 Power 1900

Petroleum Development Oman 126 Power 2050

Petroleum Development Oman 252 Power 3750

Adhunik Power & Natural Resources 270 Power 6400

Adhunik Power & Natural Resources 270 Power 6400

Ideal Energy Projects 270 Power 7030

Indian Railways 0 Industrial 9900

NTPC-Tamil Nadu Electricity Co. 500 Power 13000

Korba West Power Co. 600 Power 14750

Jindal India Thermal Co. Ltd. 1200 Power 26000

Monnet Power Co. Ltd 1050 Power 26300

Jindal Power Ltd 2400 Power 50400

Prrayagraj Power Gen. Co. 1980 Power 56000

Karnataka Power Corporation 3 Power 420

Power Grid NA Power 2000

Hindalco Industries 900 Power NA

Source: Sushil Finance Research

February 01 , 2010

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Capacity expansion to provide economies of scale India has been witnessing a huge surge in power equipment demand on back of the capacity additions in the power sector. In order to cater to this demand a huge onus lies on BHEL. BHEL has been catering to 65% of the all India capacity additions. BHEL currently has a manufacturing capacity of 15,000 MW, which has been expanded over a period of time from 6000 MW in FY05. The capacity of 15,000 MW will stabilize by March 2010. Hence the complete benefits of the expanded capacity will start accruing from FY11 onwards. The capacity expansion has taken place at a cost of ~Rs.11 bn. The Company further plans to expand its capacity to 20,000 MW by 2012 at a capital expenditure of ~ Rs. 16 bn. It is planned to come into operations from Dec 2011. BHEL is currently operating at a full capacity and in addition outsources significant amount of BTG (boiler-turbine-generator) work. BHEL is at an advantage compared to its competitors as most of its capacity addition is a brown field expansion whereas its competitors are doing greenfield expansions. With the increase in the capacities, BHEL will be able to save on outsourcing costs, as well as achieve economies of scale thereby enhancing its operating margins. In addition to the above BHEL has planned a capacity augmentation of transformers from 20,500 to 45,000 MVA and Capacity enhancement of Electrical Motors from 1340 nos. to 2250 nos.

BHEL - Major operating units

Bhopal Heavy Electrical Plant

Jhansi Transformer plant

Haridwar Heavy Electrical Equipment, Pollution Control Research, Central Foundry Forge Plant

Hyderabad Heavy Power Equipment Plant

Tirchy High Pressure Boiler Plant, Seamless Steel Tube Plant, Welding Research Institute

Ranipat Boiler Auxiliaries Plant

Bangalore Electronics and Industrial Systems Division

Source: Company

Salient Features of capacity augmentation • In view of uncertainty of Gas and Nuclear Capacities, provision for inter-

changeability of facilities have been made. • Inter-Unit and Intra-Unit Load sharing has been provided. • Respective facilities have inbuilt Capacity for Spares based on their consumption. • Installed Capacity has 10-15% stretch margin, as demonstrated in past.

Super-Critical projects to provide the next growth trigger Share of total Super Critical Sets is expected to be 43,640 MW (59% of Coal based sets) in 12th Plan and 64,000 MW (100% of Coal based sets) in 13th Plan.

Plan Total Subcritical

MW

600 MW

(Nos.)

800 MW

(Nos.)

Total Supercritical

MW

Total

10th

9620 0 0 0 9620

11th

44490 9 2 7540 52030

12th 30473 54 10 43640 74113

13th 0 54 23 64100 64100

Source: Company, International Conclave

In order to promote indigenous manufacturing in India for supercritical power equipments, the CEA’s policy paper has stipulated certain guidelines which include

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technical restrictions such as maximum design turbine cycle heat rate of 1850 kcal/kwhr (incase unit is provided with steam driven boiler feed pumps) & 1810 kcal/kwhr (in case of electrically driven boiler feed pumps). All Central and State PSU’s have been directed to invite bids of BTG for supercritical projects mandatorily from companies setting up indigenous manufacturing facilities in India, as per proposal for bulk ordering of 11 units. Further all the supercritical units to be set up by public/private will be eligible for customs duty and deemed exports benefits. The Government is also working on ushering in 10 ‘ultra supercritical’ power projects of 800 MW capacity each. These could be ready for tendering next month, after the current proposal for putting up 11 supercritical projects of NTPC and Damodar Valley Corporation is floated. Till date, BHEL has alredy won folowing orders for super-critical projects from below listed companies

Source: CEA

In order to get benefit of the supercritical projects and to minimize the impact of competition BHEL has signed up JVs with state utilities where BHEL holds a 26% stake. These JVs would place BTG orders for Power equipment with BHEL.

Source: Company

BHEL proving its prowess, in spite of competition from Chinese equipment In the 11th plan period, out of the likely thermal power capacity addition of 61,237 MW, equipment for about 21,000 MW is being imported from China. Similarly, out of total orders of about 15,000 MW for hydro power projects, orders for 464 MW have been placed on Chinese manufacturers. In the 12th plan period, out of total orders of about 45,000 MW placed so far, orders for thermal capacity of about 14,000 MW have been placed on Chinese manufacturers or suppliers. Equipments for about 33 % of thermal projects are being imported from China. Thus, the import of cheaper power equipment from China has been imposing a threat to domestic manufacturers including BHEL. A CEA panel has recently observed that the Chinese equipment was on par with the Indian equipment - quality wise and operated at 81% PLF in Sep-Nov 09.It also mentioned that the delivery schedule of Chinese equipments was better compared to that of BHEL. This panel had put all the quality issues being raised about Chinese equipment to rest. However, a recent cancelation of order placed with a Chinese manufacturer by Indiabulls and subsequent placement of the same order with BHEL has once again raised concerns on the quality of the Chinese equipment. BHEL has agreed to the fact that Chinese manufacturers are a threat. However, BHEL has also claimed that its equipment performance has been consistently 2% higher than other available

Project Company Supplier Capacity (MW)

Krishnapatnam AP Genco BHEL / L&T 1,980

Barh Stage 2 NTPC BHEL 1,600

TNEB TNEB - BHEL JV BHEL 1,320

Bara Jaiprakash BHEL 1,980

States Capacity (MW) Configuration

Tamil Nadu 1,600 2 X 800MW

Karnataka 1,980-2,400 3 X 660/800MW

Maharashtra 1,320 2 X 660MW

Madhya Pradesh 1,600 2 X 800MW

Total 6,500-6,920

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equipments and operating availability is also higher. Even though the initial capital cost of Chinese sets is lower, operating cost is higher than Indian sets resulting in over-all higher cost.

BHEL is also in talks with China’s largest manufacturer of high-voltage transformers, Tebian Electric Apparatus Stock Co. Ltd (TBEA), to jointly manufacture power equipment in India. Currently, BHEL manufactures power transformers up to capacity of 400kV while TBEA has the capacity to make ultra high voltage (UHV) power equipment of up to 1,000kV capacity. A tie-up with TBEA will allow BHEL to compete with companies such as Siemens AG and ABB in the high-voltage segment, which is expected to receive a boost in view of the expansion of the National Grid.

Sales to grow at 24% CAGR and Operating Margins to expand by 521 bps

BHEL’s current order book is currently 4.4x its trailing twelve month revenues. We believe that going forward its growth in order book intake will slowdown given the fact that a significant portion of orders in the 12th and the 13th plan will be for supercritical projects and several new players are expected to enter into this industry. This would eventually reduce BHEL’s market share. However, given its already robust order book and increasing share of industry segment in its order book, there is a clear visibility of revenues for next three and half years. BHEL’s revenue would be able to grow at a CAGR of 24% from FY09 to FY12E.

Source: Sushil Finance Research Estimates, Company

BHEL’s expansion would enable it to reduce its outsourcing costs and attain economies of scale by spreading its fixed costs over its higher volumes. Further, benefits of lower commodity costs have already started accruing and larger size of boiler orders from 12th plan would aid in reduce the raw material as a percentage of sales from 62.8% in FY09 to 60.5% in FY12E. The wage revision had dented BHEL’s margins during FY09. A lot of uncertainty towards this wage revision has now been a settled. BHEL is planning to add 18,000-20,000 employees up to FY12E. Although the cost per employee would rise, productivity per employee on expanded capacities would go higher. We expect BHEL’s operating margins to improve by 521 bps to 19.3% by FY12.

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Source: Sushil Finance Research Estimates, Company

Opportunities in the Power generation and Power equipment industry

India has been one of the fastest growing economies in emerging markets. Indian economy has posted more than 9% growth for three years consecutively and has seen a decade of more than 7% growth. One of the key factors behind any growing country is the energy requirement and supply in that country. The Indian power sector has historically been characterized by energy shortages which have been increasing over the years. In the period from April 2009 to Dec 2009, peak energy deficit has been 11%. Due to inadequate supply and distribution infrastructure, the per capita consumption of energy in India is extremely low in comparison to most other parts of the world.

Source: CEA

According to the 17th Electric Power Survey, India’s peak demand will reach approximately 153 GW with an energy requirement of approximately 969 billion units by fiscal year 2012. By the fiscal year 2017, peak demand is expected to reach 218 GW with an energy requirement of 1,392 billion units.

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Source: CEA Conclave

Projected capacity addition chart

Source:CEA Conclave

However the nation has witnessed severe slippages in the implementation of the five year plan. The target set for capacity addition during the 10th Plan was 41,110 MW against which the capacity addition achieved during 10th Plan was 21,180 MW. Some of the major reasons for slippages during the 10th Five year plan

Delay and non sequential supplies/erection by suppliers/contractors

Delay in tie-up of super critical technology by indigenous manufacturers

Non-availability of Gas/Fuel

Delay in award of works

Projects not taken up/Escrow cover not given/Financial closure not achieved/Funds not tied up

Delay in approval of investment decision of Hydro projects

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Delay in Environmental clearance, Geological surprises, Natural calamities, R&R issues, delay in signing of MoU with host state, Court Cases for Hydro Projects.

Law & Order Problems.

Present Status of the projects during 11th plan

As of Dec 2009 India’s total installed capacity has reached 156,092 MW, which is an addition of 23,763.23 MW over the installed capacity during the 10th plan period. As per the planning commission, target capacity of 78,577 MW needs to be added during the 11th plan.

Projected Power demand Based on the projected demand, Integrated Energy Policy projections for Capacity addition requirement is: XI Plan - 102,000 MW (target - 78,577 MW) XII Plan - 104,000 MW (target ~100000 MW) XIII Plan - 151,000 MW (target ~100000 MW) XIV Plan - 197,000 MW

Reasons for delay in 11th Plan • Delay in placement of orders - mainly Civil Works & BOPs. • Delay and non-sequential supply of material for Main Plant and BoPs. • Shortage of skilled manpower for erection and commissioning. • Contractual disputes. • Inadequate deployment of construction machinery. • Shortage of fuel (Gas & Nuclear). • Delay in Land Acquisition.

Delay in creation of infrastructure facilities

12th plan capacity addition envisaged

A capacity addition of about 100,000 MW from conventional power projects is required during the 12th Plan to meet the All-India demand projections of 17th EPS Report. CEA has identified shelf of Hydro projects totaling to about 30,000 MW for 12th Plan. Out of this, projects of about 5,000 MW have major problems related to environment and R&R. On detailed examination, commissioning of Hydro capacity of about 25,000 MW seems feasible and the remaining projects need to be pursued for early completion of DPRs and statutory clearances. A shelf of about 100,000 MW projects has also been prepared comprising of projects which have been given Coal linkage or have been allotted Coal block or are based on imported Coal. Gas based capacity has not been firmed up for the 12th Plan so far due to uncertainty about availability of Gas for Power Sector.

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Source: International Conclave, Base Paper

Opportunity in Power equipment

Power equipment broadly comprises of two categories viz. boiler-turbine-generator (BTG) (50%) and balance of plant (BOP) (35%). A BTG package contains 50% boilers and 50% turbine-generators. A balance of plant typically consists of coal handling plant, ash handling, chimneys, cooling towers, DM plant, fuel oil system and pre-treatment plant. With every capacity addition plan, there is an increased requirement of power equipments. Assuming an addition of ~270 GW until 13th plan, BTG demand translates to ~135 GW. This means an annual demand of 11 GW per annum. Assuming a Rs. 50 mn capex for the power plant the BTG opportunity would be about Rs.6.8 trn. (50% of total spend).

Estimated requirement for BOP during the 12th plan

During the Eleventh and Twelfth plans, India targets to add ~170 GW which in turn would generate a BoP opportunity worth INR 2.9 trn (Rs.17 mn per MW to be spent across various BOP packages).

BOP Requirement during 12th Plan

Name of the System BOP's Requirement

Cool Handling System 148

Ash Handling System 148

DM Plant 211

Cooling Towers 218

Chimneys 77

Fuel Oil System 148

Pre-Treatment Plant 160

Source: Base Paper, International Conclave

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Hydro Thermal Nuclear

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Risk & Concerns Delays in the expansion of capacity could affect the volume and earnings estimate

for BHEL.

Significant jump in commodity prices can affect our operating margin estimates.

Several new players such as L&T, Bharat Forge, JSW Group, BGR Energy, and Thermax have been reportedly planning to form a JV with a foreign partner and have plans to enter manufacturing of supercritical power equipments. This will create a level playing field, thus, giving BHEL a tough competition in bidding for supercritical projects.

With new players entering the BTG manufacturing, there could be a possible overcapacity threat that could be faced by the industry.

A CEA panel has recently observed that the Chinese equipment was on par with the Indian equipment quality wise and operated at 81% PLF in Sep-Nov 09. This could ease concerns over quality of the Chinese equipment and increase competition for BHEL.

OUTLOOK & VALUATION BHEL is the largest manufacturer of power equipment in the country. The company has been expanding its capacities on back of the increased capacities coming up during the 11th and 12th Plan. Several super-critical orders are awaited to be released which is expected to provide further impetus to BHEL’s already robust order book. BHEL has also increased its order book from industry segment which could enable it to continue the pace of its growth in the future. We expect the sales of the company to grow at a CAGR of 24% in next three years. BHEL will be able to improve its margins by 521 bps by FY12. At CMP of Rs.2406 the stock is trading 23x FY11E EPS of Rs.105 & 18x FY12E EPS of Rs.137. Given its strong order book, strong balance sheet and proven track record of the management, BHEL is well poised to capture the upcoming opportunities in the Power sector in the country and thus we initiate coverage with an Accumulate rating on the Company with a target price of Rs.2767 (based on 20x its FY12E EPS of Rs.137).

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Annexure: Company Background BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India. BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc.

The wide network of BHEL's 14 manufacturing divisions, 4 power sector regional centers, 8 service centers, 15 regional offices, one subsidiary co., Joint Ventures and a large number of Project Sites spread all over India and abroad enables the Company to promptly serve its customers and provide them with suitable products, systems and services - efficiently and at competitive prices.

Power Generation

BHEL manufactures a wide range of products and systems for thermal, nuclear, gas and hydro-based utility power plants. BHEL has proven turnkey capabilities for executing power projects from Concept to Commissioning. BHEL-built power generating sets account for nearly two third of the overall Installed capacity and around three fourth of the power generated in India. BHEL supplies steam turbines, generators, boilers and matching auxiliaries up to 800 MW ratings including supercritical sets of 660/800 MW. BHEL has facilities to go up to 1000 MW unit size. BHEL-make steam turbines are designed to achieve higher efficiencies. To make efficient use of high ash content coal available in India, BHEL also supplies circulating fluidized bed combustion (CFBC) boilers for thermal plants. BHEL manufactures 220/235/500/540 MWe Nuclear turbine-generator sets. BHEL is the only Indian company capable of manufacturing large-size gas based power plant equipment, comprising advanced-class combined-cycle operations. It has retained 100% share of R&M market of Thermal sets in the country. BHEL is one of the few companies worldwide, involved in the development of Integrated Gasification Combined Cycle (IGCC) technology which would usher in clean technology. BHEL offers a large variety of control equipment and solutions, for power stations ranging from simple control systems to single push-button automation. Company has expertise of supplying complete Systems for entire power stations comprising Boiler, Turbine and Balance of Plant (BOP).

Industries BHEL is a leading manufacturer of a variety of electrical electronic and mechanical equipment, to meet the demands of a number of industries, like metallurgical, mining, cement, paper, fertilizers, refineries & petro chemicals etc. other than power utilities. BHEL has supplied systems and individual products including a large number of co-generation 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 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. BHEL is the leading company in the world having mastered the art of burning Naptha in Gas Turbines Industry sector is fully geared to execute EPC contracts for captive power plants from concept to commissioning.

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Railways BHEL provides traction propulsion system and controls to Indian railways. The range includes traction motors, traction generators/alternators, transformers, substation equipment, vacuum circuit breakers, locomotive bogies, smoothing reactors, exciters, converters, inverters, choppers and associated control equipment, viz., master controllers, chopper controllers, brake and door equipment, electronic controls including software based controls extending to rolling stock and other transport applications. BHEL has manufactured and supplied a large number of 3900HP electric locomotives and 4700HP AC/DC locomotives to Indian Railways and diesel-electric locomotives ranging from 350 HP to 2600 HP to cement, steel and fertilizer plants, thermal power stations coalfields, ports, and other medium and large industries and urban transportation projects. BHEL has also established itself as a leading supplier of state-of-the-art propulsion equipment to Indian Railways for 3-phase drive 6000 HP electric locos, 4000 HP diesel-electric locos, electrical multiple units etc.

Renewable Energy BHEL has made rapid strides in this strategically important area of non-conventional energy, which holds the key to the problem of burgeoning energy needs, on the one hand and rapidly depleting fossil-based energy sources, on the other. Range of Renewable Energy product and systems manufactured and supplied includes a number of solar water heating systems, solar photo-voltaic (SPV) systems for both Domestic and Industrial application and wind electric generators all over India. BHEL also has the capability to set up Grid-connected and Hybrid SPV Power Plants. In addition, BHEL fabricates space-grade solar panels and space-quality batteries for satellites launched by ISRO. BHEL is also supplying small hydro power plants (up to 25 MW station capacity) for distributed power generation. The range of equipment covers onshore deep drilling rigs, super-deep drilling rigs, heli-rigs, work over rigs, mobile rigs and desert rigs with matching draw works and hoisting equipment. The diesel-electric oil rigs for onshore drilling made by BHEL are suitable for depths up to 9,000 meters.

Transmission The products manufactured by BHEL include Power transformers, Instrument transformers, Dry type transformers, Shunt reactors, Vacuum and SF6 switchgear, Gas insulated switchgears, Ceramic insulators, etc. Major critical hardware such as capacitor banks, circuit breakers, control and protection equipment and thyristor valves are in its manufacturing range. BHEL has developed and commissioned indigenous 36KV and 145 KV Gas Insulated Substation (GIS).

International Business BHEL has, over the years, established its references in 70 countries across 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. The experience with these projects has provided BHEL the experience of working with world renowned consulting organizations and inspection agencies.

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Source : Company, Sushil Finance Research Estimates

PROFIT & LOSS STATEMENT Rs.mn

Y/E March FY09 FY10E FY11E FY12E

Net Sales 262123 322382 402977 503721

Total Raw material 164685 196653 245816 304751

Personnel Costs 29837 32820 36103 40074

SG&A 18358 23211 29417 37779

Others 12198 15152 18940 23675

EBITDA 37046 54545 72701 97442

Interest 307 300 350 450

Depreciation 3343 4226 5518 6879

Other Income 14604 14210 13510 14390

Extraordinary items (489) - - -

PBT 48489 64229 80343 104504

Tax 17106 23122 28924 37621

RPAT 31382 41106 51420 66882

Extraordinary adj 262 - - -

APAT 31120 41106 51420 66882

BALANCE SHEET STATEMENT Rs.mn

As on 31st

March FY09 FY10E FY11E FY12E

Share Capital 4895 4895 4895 4895

Reserves & Surplus 124493 155300 195852 251295

Net Worth 129388 160195 200747 256190

Secured Loans - - - -

Unsecured Loans 1494 1494 1494 1494

Total Loan funds 1494 1494 1494 1494

Deferred tax liability (18403) (24826) (32860) (43311)

Capital Employed 112479 136863 169381 214373

Net Block 15116 28890 42812 55934

Cap. WIP 11570 10000 12000 15000

Add: Lease Adjustment (412) - - -

Investments 523.4 523.4 523.4 523.4

Sundry Debtors 159755 198728 249515 313273

Cash & Bank Bal 103147 101662 107376 120009

Loans & Advances 24237 28714 35868 44835

Inventories 78370 99673 127959 162812

Other current assets 3502 3852 4238 4661

Curr Liab & Prov 283329 335180 410910 502675

Net Current Assets 85682 97450 114045 142916

Total Assets 112479 136863 169381 214373

KEY RATIOS STATEMENT


Growth (%) Net Sales 35.8 23.0 25.0 25.0 APAT 8.9 32.1 25.1 30.1 EBITDA 11.6 47.2 33.3 34.0 Profitability (%)

EBITDA Margin 14.1 16.9 18.0 19.3

Adj. PAT Margin 11.9 12.8 12.8 13.3

ROCE 30.1 33.1 33.7 35.0

ROE 26.2 28.4 28.5 29.3

Per Share Data (Rs.)

Adj. EPS 63.6 84.0 105.0 136.6

Adj. CEPS 60.7 79.5 99.9 129.3

BVPS 264.3 327.3 410.1 523.3

Valuations (X)

PER 37.8 28.7 22.9 17.6

PEG 4.3 0.9 0.9 0.6

P/BV 9.1 7.4 5.9 4.6

EV / EBITDA 29.0 19.7 14.7 10.9

EV / Net sales 4.1 3.3 2.7 2.1

Dividend Yield (%) 0.7 0.7 0.8 0.8

Turnover Days

Debtors days 222.5 225.0 226.0 227.0

Creditors days 153.4 155.0 150.0 145.0

Gearing Rations

Total Debt to Equity - - - -

CASH FLOW STATEMENT Rs.mn


PAT 31382 41106 51420 66882

Depreciation & Amortization

3102 4226 5518 6879

Chg in Deferred tax (5024) (6423) (8034) (10450) Chg in Working cap 12444 (13253) (10881) (16238) Cash flow from operations

41904 25657 38022 47072

Chg in Gross PPE (7814) (18000) (19440) (20000) Chg in WIP (4989) 1570 (2000) (3000) Chg in Investments (441) 0 0 0 Chg in others (179) (412) 0 0 Cash flow from investing

(13423) (16843) (21440) (23000)

Chg in debt 542 - - - Chg in Share Capital - - - - Chg in reserves - 10 14 15 Dividend (9736) (10309) (10882) (11455) Cash flow from financing

(9194) (10299) (10868) (11440)

Chg in cash 19287 (1485) 5714 12633

Cash at start 83860 103147 101662 107376

Cash at end 103147 101662 107376 120009

February 01 , 2010

15


Rating Scale

This is a guide to the rating system used by our Equity Research Team. Our rating system

comprises of six rating categories, with a corresponding risk rating.

Risk Rating

Risk Description Predictability of Earnings / Dividends; Price Volatility

Low Risk High predictability / Low volatility

Medium Risk Moderate predictability / volatility

High Risk Low predictability / High volatility

Total Expected Return Matrix

Rating Low Risk Medium Risk High Risk

Buy Over 15 % Over 20% Over 25%

Accumulate 10 % to 15 % 15% to 20% 20% to 25%

Hold 0% to 10 % 0% to 15% 0% to 20%

Sell Negative Returns Negative Returns Negative Returns

Neutral Not Applicable Not Applicable Not Applicable

Not Rated Not Applicable Not Applicable Not Applicable

Please Note

enhanced our return criteria for such stocks by five percentage points.

“Desk Research Call” is based on the publicly available information on the companies we find interesting and are quoting at attractive valuations. While we do not claim that we have compiled information based on our meeting with

the management, we have taken enough care to ensure that the content of the report is reliable. Although we have

christened the report as “Desk Research Calls” (DRC), we intend to release regular updates on the company as is done in our other rated calls.

Additional information with respect to any securities referred to herein will be available upon request.

This report is prepared for the exclusive use of Sushil Group clients only and should not be reproduced, re-circulated,

published in any media, website or otherwise, in any form or manner, in part or as a whole, without the express

consent in writing of Sushil Financial Services Private Limited. Any unauthorized use, disclosure or public dissemination of information contained herein is prohibited. This report is to be used only by the original recipient to

whom it is sent.

This is for private circulation only and the said document does not constitute an offer to buy or sell any securities

mentioned herein. While utmost care has been taken in preparing the above, we claim no responsibility for its

accuracy. We shall not be liable for any direct or indirect losses arising from the use thereof and the investors are requested to use the information contained herein at their own risk.

This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security. It does not purport to be a complete description of the securities, markets or developments referred to in the

material. The information, on which the report is based, has been obtained from sources, which we believe to be reliable, but we have not independently verified such information and we do not guarantee that it is accurate or

complete. All expressions of opinion are subject to change without notice.

Sushil Financial Services Private Limited and its connected companies, and their respective directors, officers and

employees (to be collectively known as SFSPL), may, from time to time, have a long or short position in the securities

mentioned and may sell or buy such securities. SFSPL may act upon or make use of information contained herein prior to the publication thereof.

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