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Bhel: Paying a stiff price for being a PSU - Views on News from Equitymaster
 
 
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  • Jun 28, 2000

    Bhel: Paying a stiff price for being a PSU

    Recently we had done a comparative study comparing Bharat Heavy Electricals (Bhel) vs Asea Brown Boveri (ABB), which highlighted the disparity in valuations between the two. Following that we decided to compare Bhel against ABB as well as Siemens, which further underlined that the bourses are indeed giving a step-motherly treatment to Bhel.

    The valuation scorecard
      BHEL Siemens ABB
      Mar-00 Sep-99 Dec-99
    Operating Profit Margin 15.4% 5.6% 7.4%
    Net profit margin 7.6% 3.2% 4.8%
    Return on assets 7.0% 3.7% 5.0%
    Return on equity 15.0% 18.0% 10.1%
    Return on capital 16.1% 25.0% 11.6%
    Earnings per share (Rs) 21.4 9.9 9.0
    P/E Ratio (X) 6.1 31.7 23.7
    Price/Book value (X) 0.9 4.6 2.4
    Market Price (Rs) 130.0 313.0 213.0

    There are several negatives for Bhel. It is government owned and has a bloated workforce (in excess of 62,000 in FY99). There is also a feeling that the company has spread its wings too wide. It currently manufactures almost all the components for power generation and transmission equipment in house and is thus unable to exploit the cost savings that would arise on outsourcing components, while it could concentrate on assembly and design, which will add more value to its bottomline.

    On the other hand Siemens and ABB are multinational companies which concentrate more on high-end equipment manufacture and design. They are leaner compared to Bhel. But ironically, all this doesn’t translate into healthier operating efficiencies for these two MNCs vis-a-vis Bhel as is apparent from the table above.

    In fact, Bhel has supplied equipment to almost 65% of India’s total generating capacity. Till date, the company has been awarded almost 85% of all power equipment contracts floated by National Thermal Power Corporation (NTPC). NTPC is planning additional capacities to the tune of 2,800 MW, at a cost of Rs 52 bn. BHEL could be a significant beneficiary of this expansion.

    Though there is frustration at the way the power sector reforms are being handled by the government, everyone is certain that in India it is a sunrise sector. Once these initial teething problems are over, Bhel looks well placed to be a major supplier of equipment to captive power projects (CPPs) as well as Independent Power Projects (IPPs).

    As for its bloated employee strength, the company has trimmed its workforce by 8,000 to bring it down to 54,000 in FY2000.

    Based on all these facts, this maybe a good time to take a relook at this engineering behemoth.

     

     

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