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Analyst Research Report Snapshot


BHEL (BHEL) - Co. Report - Dtd. Sept. 18, 2012




Axis Capital Limited


20 Sep 2012





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We downgrade BHEL to SELL from HOLD to factor in our rising concerns on order inflow growth and higher proportion of slow moving projects in order backlog. Our EPS estimates stand revised to Rs 20.0/Rs 14.7 for FY14/FY15 from Rs 21.1 /Rs 18.5 earlier. Our revised target price of Rs 179 (vs. Rs 224 earlier) is based on 14x FY15E EPS, discounted at 15% p.a. What markets are pricing in at CMP? Reverse DCF exercise suggests CMP factors in 5% revenue CAGR (FY15 onwards), EBITDA margin of 17% which is unlikely due to pricing erosion and cost disadvantage, working capital/sales at 25% (through cycle average); however, working capital/sales could increase to 35-40% of sales due to rising receivables and lower advances. Order inflow concerns persist as private sector projects are on hold and central/state utilities orders are delayed  Channel checks suggest BTG equipment order pipeline for FY13 has shrunk to 4 GW (excl. NTPC bulk tenders that were finalized in FY12; to be awarded in FY13) from 10-15 GW in the beginning of FY13  Order pipeline to remain subdued at 8-10 GW in FY14 (30 GW in FY09-11) as bulk of the tendering for the 12th Plan is complete  Reduce our FY13 order inflow estimate for BHEL to Rs 362 bn (Rs 452 bn earlier)  Our channel checks, interaction with management, and detailed project-wise analysis of order backlog indicate 15-20% of backlog is slow moving Structural issues exist as BHEL’s costs are 10-15% higher than Indian peers (leaner cost structure and lower material cost on speedy indigenization) and 15-20% higher than Chinese peers even after factoring in proposed import duty of 21%, currency impact (INR/RMB depreciation), and better equipment efficiency for BHEL. Margin to deteriorate to 14-15% over 3 years vs. 21% in FY12 due to structural issues and price erosion. Note NTPC bulk tender pricing in FY12 was at Rs 14 mn/MW vs. break-even for BHEL at Rs 16 mn/MW. At CMP of Rs 225 (implies 20% downside) the stock trades at PE of 9x FY13E EPS of Rs 24 and 11x FY14E EPS of Rs 20. However, we believe historical valuation for BHEL is not comparable as the company is facing structural issues. Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research ENAM Securities Pvt Ltd. Tel: +91 22 4325 1144 Charanjit Singh (Vice President – Capital Goods) Institutional Equity Research ENAM Securities Pvt Ltd. Tel: +91 22 4325 1123

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