Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited BHEL delivered a better than expected top‐line on the back of strong execution in both utilities and industry segments. Execution during Q1FY13 was 2.2GW vs 1.3GW in Q1FY12. The company reported an improved OI of INR55.9bn albeit on a lower base of INR25bn last year. The management reiterated FY13E guidance of INR600bn OI with a higher focus on EPC based projects, transportation (locomotives) and T&D. We maintain HOLD. Execution a positive surprise; higher opex dents OPM Strong execution during the quarter came in as a positive surprise, both for us as well the Street. This was led by a robust volume growth in utility and industry space. For Q1FY13, BHEL delivered a 73% YoY increase in execution on MW basis to 2200MW. EBIDTA margins dropped 90bps YoY, led by higher provisioning (LD +Contractual obligations) of INR2.14bn (up 48 % YoY) and higher freight cost (up by INR390mn). Management reiterates FY13E guidance on OI, revenues BHEL management has reiterated its FY13E order intake guidance at INR600bn, implying an order intake of INR544bn vs INR195bn during 9MFY12 which we believe is very aggressive. The management targets to incrementally focus on EPC projects as against its historical focus on BTG projects. We remain confident on BHEL’s sales guidance of INR500bn (MoU signed on excellent target basis) given the status on current delivery time‐lines. New intake for Q1FY13 stands at INR56bn (up 126% YoY on low base) driven by project awards from the Govt space (NTPC, RRVUNL etc). Outlook and valuations: Sticky concerns; maintain ‘HOLD’ While BHEL has delivered a commendable execution performance during Q1FY13 despite broader industry concerns, we believe that declining revenue visibility and rising competitive scenario among domestic players remain a key issue, especially with the scarcity of a project pipeline in the private space. We do not see any major uptick in the domestic BTG industry in the near to medium term (next two years) given the slow traction in current projects (WIP), sustaining issues like coal and land availability, etc. We do not expect any major upside on account of non‐BTG ordering in the near term. Maintain HOLD/SP with a TP of INR 204/sh. The stock currently trades at a P/E of 8.3x & 8.4x its FY13E & FY14E earnings respectively. RESULT UPDATE BHARAT HEAVY ELECTRICALS Beats estimates, but prospects remain weak EDELWEISS 4D RATINGS Absolute Rating HOLD Rating Relative to Sector Performer Risk Rating Relative to Sector Low Sector Relative to Market Equalweight MARKET DATA (R: BHEL.BO, B: BHEL IN) CMP : INR 212 Target Price : INR 204 52‐week range (INR) : 405 / 197 Share in issue (mn) : 2,447.6 M cap (INR bn/USD mn) : 519/ 9,299 Avg. Daily Vol.BSE/NSE(‘000) : 5,412.2 SHARE HOLDING PATTERN (%) Current Q4FY12 Q3FY12 Promoters % 67.7 67.7 67.7 MF's, FI's & BK’s 13.1 12.8 13.5 FII's 12.9 13.5 12.2 others 6.2 6.0 6.5 * Promoters pledged share (% of share in issue) : NIL PRICE PERFORMANCE (%) Stock Nifty EW Capital Goods Index 1 month (3.3) (1.5) 5.0 3 months (8.4) (2.8) (13.1) 12 months (44.3) (9.5) (31.4) Amit Mahawar +91 22 4040 7451 [email protected]Rahul Gajare +91 22 4063 5561 [email protected]Swarnim Maheshwari +91 22 4040 7418 [email protected]India Equity Research| Engineering and Capital Goods July 26, 2012 Financials Year to March Q1FY13 Q1FY12 % change Q4FY12 % change FY12 FY13E FY14E Net rev. (INR mn) 84,390 72,715 16.1 195,889 (56.9) 479,789 518,032 528,108 EBITDA (INR mn) 12,022 11,132 8.0 49,372 (75.7) 98,880 93,780 93,583 Core profit (INR mn) 9,209 8,155 12.9 33,798 (72.8) 70,400 62,238 61,584 Diluted EPS (INR) 3.8 3.3 12.9 13.8 (72.8) 28.8 25.4 25.2 Diluted P/E(x) 7.4 8.3 8.4 EV/EBITDA (x) 4.5 4.9 5.0 ROAE (%) 30.9 22.3 18.8
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Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
BHEL delivered a better than expected top‐line on the back of strong execution in both utilities and industry segments. Execution during Q1FY13 was 2.2GW vs 1.3GW in Q1FY12. The company reported an improved OI of INR55.9bn albeit on a lower base of INR25bn last year. The management reiterated FY13E guidance of INR600bn OI with a higher focus on EPC based projects, transportation (locomotives) and T&D. We maintain HOLD.
Execution a positive surprise; higher opex dents OPM Strong execution during the quarter came in as a positive surprise, both for us as well the Street. This was led by a robust volume growth in utility and industry space. For Q1FY13, BHEL delivered a 73% YoY increase in execution on MW basis to 2200MW. EBIDTA margins dropped 90bps YoY, led by higher provisioning (LD +Contractual obligations) of INR2.14bn (up 48 % YoY) and higher freight cost (up by INR390mn).
Management reiterates FY13E guidance on OI, revenues BHEL management has reiterated its FY13E order intake guidance at INR600bn, implying an order intake of INR544bn vs INR195bn during 9MFY12 which we believe is very aggressive. The management targets to incrementally focus on EPC projects as against its historical focus on BTG projects. We remain confident on BHEL’s sales guidance of INR500bn (MoU signed on excellent target basis) given the status on current delivery time‐lines. New intake for Q1FY13 stands at INR56bn (up 126% YoY on low base) driven by project awards from the Govt space (NTPC, RRVUNL etc).
Outlook and valuations: Sticky concerns; maintain ‘HOLD’ While BHEL has delivered a commendable execution performance during Q1FY13 despite broader industry concerns, we believe that declining revenue visibility and rising competitive scenario among domestic players remain a key issue, especially with the scarcity of a project pipeline in the private space. We do not see any major uptick in the domestic BTG industry in the near to medium term (next two years) given the slow traction in current projects (WIP), sustaining issues like coal and land availability, etc. We do not expect any major upside on account of non‐BTG ordering in the near term. Maintain HOLD/SP with a TP of INR 204/sh. The stock currently trades at a P/E of 8.3x & 8.4x its FY13E & FY14E earnings respectively.
RESULT UPDATE
BHARAT HEAVY ELECTRICALSBeats estimates, but prospects remain weak
EDELWEISS 4D RATINGS
Absolute Rating HOLD
Rating Relative to Sector Performer
Risk Rating Relative to Sector Low
Sector Relative to Market Equalweight
MARKET DATA (R: BHEL.BO, B: BHEL IN)
CMP : INR 212
Target Price : INR 204
52‐week range (INR) : 405 / 197
Share in issue (mn) : 2,447.6
M cap (INR bn/USD mn) : 519/ 9,299
Avg. Daily Vol.BSE/NSE(‘000) : 5,412.2
SHARE HOLDING PATTERN (%)
Current Q4FY12 Q3FY12
Promoters %
67.7 67.7 67.7
MF's, FI's & BK’s 13.1 12.8 13.5
FII's 12.9 13.5 12.2
others 6.2 6.0 6.5 * Promoters pledged share (% of share in issue)
Key notes from Q1FY13 Conference call: • BHEL’s stand on import duty benefit: The management expects the recent import duty
announcement to benefit the company by ~4%‐5%. It forsees the recent Cabinet action regarding duty as a start to the positive government action for the power sector and remains hopeful of further decisions.
• Share of EPC projects to go up: Historically, BHEL has been targeting EPC projects on a selective basis with more than 80 % of its total power projects coming in from main plant equipment orders (BTG). Given the competitive scenario in the domestic arena, the management will incrementally target EPC based projects while continuing to outsource BoP equipments (like CHP, AHP, DM Plant etc) from external vendors.
• Sup‐critical imports at 20%, super‐critical at 25%‐30%: BHEL management indicated that for a standard 500MW unit rating (sub‐critical) project, currently it imports around 20% of the total RM which for a 660MW (super‐critical) is higher at around 25%‐30%. The management believes that its overall positioning and competiveness vs other domestic players (who import a higher proportion currently) remains intact.
• FY13E apex at INR10bn; transportation and T&D focus: BHEL is increasing its overall Locomotive manufacturing capacity by 50% over the next one year to 75 Locos/annum (upto 6000 HP) at its Jhansi plant. The company is further developing GIS capability in JV with Toshiba (Japan) to cater to domestic GIS market which is witnessing a decent growth.
• Strong potential for R&M activity with 30 GW plants with > 25 yrs age: BHEL foresees a strong traction in up‐rating and renovation & modernization (R&M) with more than 30GW of installed thermal capacities having an age of more than 25 years.
Chart 1: Order inflow movement – Improvement on a low base
Source: Company, Edelweiss research
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Bharat Heavy Electricals
3 Edelweiss Securities Limited
Chart 2: Order backlog and visibility – continues to decline
Chart 3: Revenue and revenue growth movement
Chart 4: EBITDA and EBITDA margin movement ‐ Declined due to higher LD charges
Source: Company, Edelweiss research
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Engineering and Capital Goods
4 Edelweiss Securities Limited
Chart 5: One year forward PE band – Trading at 50% below its avg. valuation
Company Description BHEL is the largest heavy engineering and manufacturing enterprise in India in the energy‐related/infrastructure sector. It manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian economy viz., power generation & transmission, industry, transportation, telecommunications, and renewable energy. The company has a wide network with 14 manufacturing divisions, four power sector regional centers, over 100 project sites, eight service centers, and 18 regional offices across the country. An extensive network enables the company promptly serve its customers and provide them with suitable products, systems, and services. The company derives major revenues from power equipment manufacturing including boiler, turbine generators, major auxiliaries etc with more than 65 % of the total component manufacturing in house.
Investment Theme Domestic power equipment market is expected to see a total ordering of ~14‐15 GW per annum over FY12E‐FY14E which coupled with an increasing BTG capacity planned hints at a huge overcapacity and pricing pressures. With most of the 12th Plan orders already placed, we do not expect any great addition to the current BTG pipeline and thus remain negative on the sector profitability over the next 2‐3 years. While BHEL will be the largest capacity BTG Company in the country with a total installed capacity of 20 GW per annum by March, 2012E, we see a huge risk of under utilization for the company owing to limited order pipeline. This could lead to a sharp dip in order inflows over the next two years, ultimately slowing the revenue growth for BHEL.
Key Risks • Sustained material improvement in coal availability and land clearance issues in the
country could change the outlook for the power sector, leading to a substantial improvement in BTG demand and its current over capacity.
• Any major inorganic expansion by BHEL in the non‐thermal space poses a key risk to our call.
Coverage group(s) of stocks by primary analyst(s): Engineering and Capital Goods ABB India, BGR Energy Systems, Bharat Electronics, Bharat Heavy Electricals, Bajaj Electricals, Crompton Greaves, Havells India, Jyoti Structures, KEC International, Cummins India, Kalpataru Power Transmission, Larsen & Toubro, Siemens, Sterlite Technologies, Techno Electric & Engineering, Thermax, Voltamp Transformers, Voltas
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 104 60 18 183* 1 stocks under review
Market Cap (INR) 114 58 11
Date Company Title Price (INR) Recos
Recent Research
23‐Jul‐12 Larsen and Toubro
Good show in tough times; Result Update
1,378 Buy
20‐Jul‐12 Crompton Greaves
Weak performance, reasonable recovery prospects; Result Update
130 Buy
16‐Jul‐12 Engineering and Capital
Goods
Expectations galore; Monthly Update
> 50bn Between 10bn and 50 bn < 10bn
Buy Hold Reduce Total
Rating Interpretation
Buy appreciate more than 15% over a 12‐month period
Hold appreciate up to 15% over a 12‐month period
Reduce depreciate more than 5% over a 12‐month period
Rating Expected to
12 Edelweiss Securities Limited
Engineering and Capital Goods
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