>Bharat Heavy Electricals Limited (ICICI DIRECT)

A dominant industry position, wide product portfolio and strong relationship with government agencies make Bharat Heavy Electricals (Bhel) the prime beneficiary of aggressive power capacity addition targets set for the XIth and XIIth plans (~178 GW). With Bhel enjoying 54% share in XIth Plan power orders and order book size of Rs 1,43,800 crore (FY10), the company enjoys strong sales visibility over the next three or four years. However, we expect new order flows to slow down over the next two or three years as 45% of XIIth plan orders have already been placed. We initiate coverage on the stock with ADD rating.

■ Strong sales visibility; robust private sector order inflows in FY10
With an order book size of Rs 1,43,800 crore in FY10 and enhanced execution capabilities (capacity increased by 50% in FY08-10 to 15 GW), we estimate robust growth of revenues at 22% CAGR in FY10-12E to Rs 49,873 crore. In FY10, Bhel secured orders worth 14.7 GW from the private sector (not a conventional stronghold for the company), contributing to the order book growth (+7.3%). In our view, the recent success in the private sector bodes well for Bhel as the sector will account for ~50% of XIIth Plan power orders (vs. 14% in the XIth Plan). Lastly,
Bhel is well positioned to capture supercritical orders (~60% in XII plan) due to its technological partnerships, JVs with state electricity boards and its first mover advantage in the supercritical segment.

■ Limited scope to grow power sector order book
Nevertheless, we estimate Bhel’s order book will peak in FY11E to Rs 155,339 crore as nearly 45% of the power equipment ordering for the XIIth Plan is already complete (54% share of Bhel). Assuming a nearly 55% share of Bhel in XIIth Plan orders, we estimate 29 GW order inflows in the power segment in FY11E-13E. In our view, Bhel will find it tough to significantly expand its margins in FY11E-12E due to the continued rise of commodity prices, execution of higher proportion of supercritical orders (higher import content) and competitive pressures.

Valuations
At the CMP of Rs 2,500, the stock is trading at a P/E of 22.8x in FY11E and 19.6x in FY12E. We have valued Bhel using the DCF methodology due to the long execution period associated with its projects (~four years). Despite strong sales visibility over the next three or four years, new order growth and margins are likely to come under pressure. We are initiating coverage on the stock with an ADD rating.

To read the full report: BHEL