>BHEL (BNP PARIBAS)

Visibility and growth priced-in: HOLD

Limited positive news & likely delays in 12th plan orders
Bharat Heavy Electricals (BHEL) management has guided to an order intake of INR500b. We estimate a less-optimistic intake of INR425b due to likely delays in the 12th plan orders, tighter financial markets impacting ordering by IPPs and drop in export orders.

No structural erosion of market share
We disagree with the Street’s view that BHEL’s order intake has peaked. Though we are modeling a 28.8% decline in FY10 orders due to delays in 12th plan orders and base effect, we expect orders to revive in FY11. We expect BHEL’s 12th-plan share to be approximately 45-50% (compared to its 55% share for the 11th-plan projects) due to: 1) Its strength in the sub-critical segment (up to 500MW); 2) strong relationships with government utilities; 3) focused execution of its strategy to indigenize super critical technology (>660MW).

No change to our FY10 sales and margin estimates
BHEL management reiterated its FY10 guidance of 20-25% y-y growth, hinting that the lower end of the guidance is conservative. We maintain our FY10 sales growth estimate of 26.7% y-y supported by: 1) easing of raw material supply constraints; 2) benefits from line balancing and additional bays at Trichy; 3) industrial slowdown freeing up capacity at ancillaries in Trichy (please refer “Visit Notes from Boiler Capital of India,” 12 March 09); and 4) a higher percentage of BTG orders among the backlog.

Downgrading to HOLD on limited upside
BHEL has outperformed the BSE Capital Goods Index over the last one year by 26.9%. We downgrade BHEL to HOLD as the stock has limited upside from current levels. BHEL stock is also trading close to our DCFbased valuation of INR1,600/share. BHEL is trading at a P/E of 16.9x our FY10 EPS estimate of INR90.33 compared to its Indian capital goods peers at 15.6x. The valuation gap between BHEL and its peers has dropped (our target P/E multiple was set at a 20% premium to peers) due to the recent liquidity driven rally. We reiterate REDUCE on ABB and Crompton Greaves which are trading at 18.4x and 9.9x on FY10 EPS respectively.

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