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Analyst Research Report Snapshot


Bharat Heavy Electricals Ltd. (BHEL) - Qtr. Update - Dtd. - October 29, 2012




Axis Capital Limited


30 Oct 2012





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BHEL’s Q2FY13 performance disappointed on most parameters except margin, which at 18% came in better than expected (16%), mainly due to lower other expenses and staff costs. Key negatives in Q2: (1) weak execution on slow moving private sector power projects, (2) revaluation of export orders and foreign currency proportion of domestic orders resulted in 24% decline in order backlog to Rs 1,223 bn, and (3) dwindling cash balance on rising working capital cycle to 117 days from 64 days YoY. Rising concerns on execution: Management indicated slower execution of power projects as developers are facing financial crunch. Also, most private power projects, esp. phase 2 expansions, have been put on hold. BHEL is holding deliveries on payment delays by customers. Our detailed project-wise analysis of backlog indicates 15-20% orders are slow moving. Order inflow concerns persist: BHEL management indicated that pipeline of 10-15 GW of tenders would be finalized in H2FY13. However, our channel checks suggest pipeline has shrunk to 4 GW on land acquisition and coal linkage issues. Also, NTPC bulk tenders of Nabinagar (3X 660MW) and Gajmara (2X 800MW) are getting delayed due to land acquisition issues. BHEL has 10-15% cost disadvantage vs. domestic peers: such as L&T-MHI, JSW-Toshiba, and Thermax-B&W. Cost disadvantage is due to (1) higher staff cost at 12-14% of sales vs. peers at 6-8% of sales, and (2) higher material cost on slower indigenization vs. peers who have access to large supply chains of MNC JV partners. Reiterate SELL with target price of Rs 179: We believe BTG market is unlikely to improve over next 2-3 years and margin issue is structural. Hence we expect BHEL’s EPS to decline to Rs 15 in FY15 (Rs 26 in FY12). Our TP of Rs 179 is based on 14x FY15E EPS of Rs 14.7 discounted at 15% pa. At CMP of Rs 227 (implies 21% downside) the stock trades at 9x FY13E EPS of Rs 24 and 11x FY14E EPS of Rs 20. Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1144 Charanjit Singh (Vice President – Capital Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1123

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