>BHEL(JP Morgan)

• BHEL’s provisional results for FY2009 showed strong execution and
signs of easing material cost pressures. 4Q PAT was however 16.5%
lower than estimates (FY2009: Rs30.4B, 4Q: Rs12.5B) due to a sudden
gratuity provision of Rs6B. We are disappointed that management
had not anticipated or guided for this liability earlier.

• We lower our estimates for FY2010 by 7%. We now have sales and
PAT growth of 21.4% and 29.6% and EBITDA margin improvement of
290bps. Non-recurrence of gratuity provisions and end of wage hike
provisions account for the margin expansion.

• During the meltdown, BHEL’s outperformance and premium
multiples arose from predictability of growth (at least the topline) in
a difficult environment. An OB of ~Rs1180B guarantees visibility
through 2012. This OB remains relatively immune to cancellations due
to the predominance of gov’t utility power projects with guaranteed
returns. The company’s ability to allay market fears of execution
bottlenecks was also an important contributor to outperformance.

• However, the return of risk appetite will likely see markets placing a
lower premium to this predictability. In our view, L&T (OW) might
outperform BHEL in a rising market, as it has done in past rising
markets. We revisit our 'everything goes right' DCF model originally
published 15 months back and believe our new Mar-2010 PT of Rs1,300
(down from Rs1400 earlier, terminal growth rate (g):6%, WACC: 11.5%,
terminal year: FY17), implying 16.2-x FY2010 earnings, is fair for the
stock. We downgrade the stock to Neutral. Key upside risk to our PT is
stronger than expected margin improvement and a rise in investor
preference for safe growth stocks.

To read full report BHEL(JP Morgan)