Tuesday, July 3, 2012


Ambitious targets set

We (Prabhudas Lilladher) recently met with the management of BHEL to get an update on the latest developments in the company and its strategy, going forward. The key takeaways of the same are as follows:

􀂄 Betting on government projects: BHEL is targeting order inflow of ~14,000MW in the current year based on different projects under various stages of discussions, tender pipelines and upcoming bids. Most of the projects are from the States and the Centre. The company has not considered the recently cancelled tender by Rajasthan SEB (Suratgarh/Chabra) in the pipeline. It is looking to bid for the revised tender. We believe that the target is quite ambitious, given the impending coal shortage issue and no resolution in sight.

􀂄 Power to dominate the orderbook in current plan, Transportation to dominate industrial segment: BHEL believes that the power sector will continue to dominate the order book in the current plan. Out of the new business (Transmission, Water, Transport, Oil&Gas etc.), it is looking to scale up the industrial segment transportation which could be the largest pie (~50% of the segment) over the next five years. The company is also exploring opportunities in the metro railway, given the huge likely thrust on metro in various cities over the next few years. It is expanding its capacity for railway locomotives from 50/annum to 75/annum. It is expecting order of ~100-125 loco from railways in the near term. It has seen no movement in awarding of locomotive plant to be built in Bihar/West Bengal. BHEL has requested the government to consider awarding at least one of the plants on nomination basis.

􀂄 Other Highlights: Out of the current order book of 62,000MW (55,000MW power, 4,000MW industrial and 3,000MW international), there are no slow moving orders. BHEL plans to add 11,000 employees in the XI plan period (will periodically scale down if needed) against 20,000 employees added in the XI plan.

􀂄 Outlook and Valuation: The stock is trading at 9.4X FY14E earnings. Though the stock is trading at multi-year low valuation, depleting order book, weak pipeline of orders, risk to execution from few private orders in order book, risk to margin due to continued pricing pressure and lack of meaningful progress on new initiatives continue to make outlook uncertain. We maintain our negative stance on BHEL.