>Bharat Heavy Electricals (MERRILL LYNCH)

‘Buy Indian’ tender in 1QFY10; Potential 4.9GW orders; Buy:
India’s proposed power equipment purchase policy offers an opportunity for BHEL to win orders worth minimum 4.9GW and maximum 7.2GW once approved by the prime minister. First of the two tenders is likely out in April 09 and order likely by 3QFY10E, in our view. This translates to estimated backlog of Rs123bn (11% of backlog) to Rs179bn (16%) over FY10-11E. Key to BHEL’s potential success here is that it will bid on a level playing field (with visibility of 7 sets of 660/800 MW order) v/s its current competitive disadvantage of low volume on super-critical
(SC) plants. We believe the stock correction is an attractive opportunity to buy ahead of growth bounceback in FY10E.

NTPC/DVC to order 12GW; BHEL could win 4.9GW
We think India’s Prime Minister is likely to approve the SC power plant tendering policy for 660/800MW in two weeks, under which, NTPC/DVC will tender 11x660MW projects on a competitive bid basis. Only vendors who have or intend to have phased manufacturing programs in India can bid for this tender. If BHEL is lowest bidder (L1), we estimate it could get orders for 6x660MW but if it is L2/L3, as per government policy it would still win orders for 5 sets at L1 price. Similarly, we anticipate NTPC/DVC will tender 6x800MW in FY11E, where we estimate
BHEL may win minimum 2 sets. A 5 set order for 660MW set would help BHEL reach 9 set order (6220MW - see Chart 3) required to indigenize SC technology from Alstom & Siemens and compete on a level playing field in future.

Competitive landscape building up; BHEL comfortable
Key competitors for BHEL in these tenders are: L&T-Mitsubishi (L&T-MHI) for Boilers and L&T-MHI, Alstom-Bharat Forge and Toshiba-JSW for turbine & generators. Given that the difference in potential order in the 11x660MW tender is not substantial – 5 if BHEL is L2 and 6 if BHEL is L1, BHEL may not bid aggressively in general and boiler tender (58% of value) in particular. Overall, SC orders would improve visibility of growth beyond FY12E and competitiveness, as it would likely encourage BHEL to expand capacity to 20GW by FY12E v/s 15GW in FY10E.

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