>BHEL (ALCHEMY)

Valuations leave little scope for out-performance

Audited results marginally better than provisional results
The order inflow of Rs156bn in 4QFY09 (+3% yoy) drove up the order book to Rs1,197bn (+40% yoy). While net sales rose 46% yoy in 4QFY09 to Rs105.4bn, EBITDA margin declined by 284bps yoy in 4QFY09. For FY09, net sales increased by 35% yoy to Rs262.3bn and EBITDA margin declined by 289bps yoy. This was due to wage provisioning of Rs17.3bn for the year (Rs 8.9bn in 4QFY09 alone) and higher raw material costs. Raw material cost as percentage of value of production increased by 940bps in 4QFY09 and 562bps in FY09. However, audited results were marginally better than the provisional results declared in April 2009.

Changing composition of power equipment demand profile
BHEL is expecting Rs500bn of orders in FY10E (Rs597bn in FY09). This will include bulk ordering from NTPC-DVC and other 12th plan orders. However, BHEL has a lower share of private sector orders in the current backlog. BHEL has only 12% share for plants expected to be commissioned in the 11th plan period. The private sector orders form 28% of 11th plan orders. Increasing the share of private sector orders and not losing orders to Chinese players (either due to lack of capacity resulting in extended delivery timelines or price differences), would be key going forward for BHEL. The orders from private sector are expected to have higher share in 12th plan orders.

In any case, competition will be tougher as BHEL will have to face not only Chinese but also domestic players who are currently setting up capacities. As such realizations and margins are expected to moderate in the longer term.

Valuations leave little scope for out-performance
We do not foresee significant re-rating from current levels as BHEL is already trading at 50% premium to Sensex. BHEL is currently trading at a P/E of 24.8x FY10E and 19.9x FY11E. We expect an EPS CAGR of 28% over FY09-FY11E and RoAE in the range of 29-30%.

We assign 15% discount to the average multiple during FY03-09 to factor in the possibility of
execution delays and higher competition. This is due to the changing composition of power equipment demand in India. Accordingly, our target price of Rs1700 per share is arrived at by taking the average of 16x FY11E PER and 10x FY11E EV/EBITDA – implying 18% potential downside. Maintain Reduce.

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