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BHEL: Power plugged
Apr 5, 2007

Power sector equipment major, BHEL, has reported strong performance for FY07, as outlined by the interim results announced by the company on Tuesday. The company’s total revenues (sales plus other income) has grown by 29% YoY during the year, aided by a strong inflow of orders for both its power and industry divisions. The company’s net profits recorded a growth of 42% YoY, indicating an improvement in profitability. Against our FY07 estimates, while the company’s actual revenues are lesser by 1%, the net profits are higher by 5%. Power generation sets manufactured by BHEL contributed to 73% of the power generated in India during the fiscal (593 m units), and accounted for 65% of the country’s power generating capacity of 125,414 MW, indicating their more efficient performance relative to sets made by other equipment companies. FY07 saw the company recording an order inflow of Rs 356 bn, 88% YoY higher than the Rs 189 bn of orders that were booked in FY06.

Continued demand for power generating units from both the central and private sector generation companies, as also some key international assignments, perked up the order inflow for the company during the year. While power sector orders grew by 155% YoY, orders from the industry segment recorded growth of 27% YoY. However, BHEL’s international orders, which had jumped six times in FY06, recorded a 43% YoY decline during FY07. International orders formed 5% of the company’s total order book in FY07 (18% in FY06).

In light of the anticipated growth in demand, the company is planning to raise it equipment manufacturing capacity to 15,000 MW by the end of 2012. This should involve a capital expenditure of Rs 32 bn. In the interim, its capacity is expected to touch 10,000 MW by the end of 2007.

What to expect?
At the current price of Rs 2,375, the stock is trading at a multiple of 13.7 times our estimated FY09 earnings, which is fair for investors who wish to hold on to the stock from a 2-years perspective. The company has continued in its growth path, much in line with our estimates. However, to what extent will it be able to sustain the momentum remains to be seen, considering that the growth in the crucial areas of power transmission and distribution is still not commensurate with the growth in power generation. However, considering that the bulk of orders for the eleventh plan (2007-12) generation capacity expansion are yet to come in, BHEL’s performance might continue to surge ahead strongly for some more quarters to come.

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