>BHARAT HEAVY ELECTRICALS LIMITED: Margin surprise led to 1Q11 numbers well above expectations

■ Strong order flows should continue in FY11F; order book remains robust
The outlook for FY11 remains strong, as orders for the 12th five-year plan start to pick up.
NTPC is planning a further tender for 9x800MW supercritical capacity in addition to its bulk
tender for 11x660MW. The company is progressing well on order conversion of its joint
ventures with states. We expect private sector orders to be strong as well for BHEL in FY11.
All these factors give us confidence in the company’s ability to meet its FY11 inflow guidance
of Rs600bn. The current order book stands at Rs1.48trn, which is 4.4x FY10A sales and
provides strong medium-term visibility.

■ Margin surprise led to 1Q11 earnings well above expectations
BHEL reported 1Q11 earnings well above our expectations on the back of higher-than anticipated margins. Overall, revenue and PAT grew 16.4% and 41.9% yoy respectively to Rs66bn and Rs6.7bn. Margins expanded 418bp yoy to 14.6%, primarily on the back of a 480bp improvement in RM/net sales. Although the company reported a top line marginally below our expectations, we expect execution to catch up in the coming quarters and believe that the lower-than-anticipated top line might be due to a slight delay in revenue booking. On the margin front, we believe there is limited room for improvement over FY10, given rising material prices, and expect margin expansion to be lower for the rest of the year.

■ Introducing FY13 numbers, maintaining our Buy recommendation
We retain our estimates for FY11 and FY12. We also introduce our FY13 numbers and roll forward our DCF, which raises our target price to Rs2,793, a change of 8% compared with our previous target price of Rs2,590. We continue to like BHEL and remain confident in its ability to maintain its leadership and profitability, even in the increasingly more competitive scenario in the industry. In this regard, we watch keenly the upcoming NTPC tender for bulk supercritical equipment. Buy rating maintained.

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