>BHEL: Recent coal sector reforms are extremely positive (ANTIQUE)

Coal reforms a key positive

The recent coal sector reforms are extremely positive for Bharat Heavy Electricals as it stands to significantly benefit from the government's decision to allocate coal mines to central and state power generators, on a nomination basis. We maintain our view that the Indian power generation equipment market is set for a rebound, on growing concerns of a power shortage in the country over the next
three-to-five years. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We reiterate our Buy rating.

■ BHEL is among the biggest beneficiaries of the ongoing reforms in the coal sector
In a key decision, the Union government recently decided to promulgate an ordinance to facilitate e-auction of coal blocks for private companies’ captive use and allot mines directly to state and central public sector undertakings. This comes in the backdrop of last month's Supreme Court order cancelling 214 coal blocks allocated to various companies since 1993. The process of auction is expected to be completed in the next three-to-four months. BHEL is the key beneficiary of these initiatives as 14 coal blocks, with 8.2bn tonne allocated to state and central PSUs, would be re-allocated and lead to higher capacity addition, with fresh equipment ordering for these capacities.

■ BHEL bagged two significant orders in the past two months
During the past few months, BHEL has bagged several orders. In the past two-months itself, the company bagged two significant orders, with an aggregate order value of INR113bn, to set-up power plants on an engineering, procurement, and construction (EPC) basis. It includes a major contract for setting up a 2X660MW supercritical thermal power plant worth INR78bn (8% of order book) at the Ennore special economic zone in Tamil Nadu from Tamil Nadu Generation and Distribution Corporation, at a healthy price of INR59m per MW, on an international competitive bid basis. BHEL also bagged an EPC order worth INR35bn from Gujarat State Electricity Corporation to set-up an 800MW power plant.

■ State electricity boards getting active to set-up capacities
Among other key developments, BHEL entered into a memorandum of understanding (MoU) with the Telangana State Power Generation Corporation to set-up 6,000MW power plants in the state. Many states are looking at aggressively building up power generation capacities, including Maharashtra, Andhra Pradesh, Telangana, and Rajasthan, which will significantly boost demand for power generation equipments over the next two-to-three years.

■ Power generation equipment market set to rebound over the next one-to-two years
We maintain our view that the Indian power generation equipment market is set for a rebound on growing concerns of a power shortage in the country over the next three-to-five years. We estimate that ~64GW (only coal) of power equipment orders will be placed during FY15-18e, predominantly by central and state sectors. In the next 12-15 months, we expect 18-20GW of orders to be placed. We see BHEL as the biggest beneficiary of a power equipment demand revival, given weakened competition, cost advantage, and high degree of localised manufacturing. We expect BHEL's order intake for FY15-17e to be an average INR521bn per year as against an average INR272bn per year during FY12-14. This will ensure a sharp pick-up in revenues from FY17 onwards. We expect BHEL's revenues to grow 6% and 17% over FY16e and FY17e, respectively.

■ Earnings to sharply rebound in FY17; Near-term earnings may be under pressure
Savings in material costs and better operating leverage will help improve EBITDA margin to 12.9% and 15.7% in FY16e and FY17e, respectively, from 11.6% in FY14. We see BHEL earnings bottoming out in FY15e (INR13.4, down 5% YoY; 48% of peak EPS of INR28.8 in FY12). We expect an earnings recovery from FY16e (17%) to spread into FY17e (41%). We maintain our Buy rating with a target price of INR315 per share (20x FY16e earnings).


RISH TRADER