BHEL: Promising prospects

The stock price of BHEL has been consistently on the rise since last 8 months. After having gained 74%, the question in one's mind is whether the rally is for real. We have analysed BHEL's business profile and future growth prospects. BHEL's operations are organised around three business sectors, namely power, other industries (includes transmission, transportation, telecommunication and renewable energy) and international operations. In FY03, contribution to revenues from the power and industrial segment was 67% and 33% respectively (in FY02, the same stood at 69% and 31%).

Coming to the core strengths of the company, BHEL is India's largest engineering company and the leading supplier for power generation equipments in India. Till date, BHEL has supplied 65% of total power generation capacity in India i.e. around 69,092 MW and 79% of thermal power generation of the country till date. It is also well placed in industrial operations like manufacturing equipments for transmission, transportation, telecommunication and renewable energy and has a market share of more than 60%. The company's international operations have been growing at an impressive rate. It received single largest export order of Rs 11.3 bn, the highest value overseas order for any capital goods manufacturing company in India. Exports actually declined in FY03 due to delay in contracts in the light of war situation. However, this was an aberration. BHEL has supplied steam generators to Malaysia in the past (accounts for about 40% of the thermal capacity in Malaysia till date).

The investment climate is likely to improve in the power sector with the passing of the Electricity Bill recently. This not only paves the way for opening up of the transmission and distribution aspect of the power sector, but also for restructuring of State Electricity Board (SEBs). Going forward, investments in power generation are likely to improve considering the ever-widening gap between demand and supply. Consequently, BHEL as a major player in setting up of power plants is likely to benefit.

To put things in perspective, NTPC is planning to add another 20,000 MW in the next decade. Historically, BHEL has bagged 85% of contracts from NTPC and the trend is expected to continue. This is not only because both are public sector undertakings but also because none other than BHEL has experience and ability to make coal boilers. It costs around Rs 25 m to set up 1 MW capacity. Assuming that only 50% of the contract is won by BHEL, revenues from NTPC alone will be Rs 250 bn by 2012 (turnover of BHEL in FY03 was Rs 69.8 bn). Recently BHEL has joined hands with NTPC for undertaking maintenance jobs of power plants as well, which will increase services income in the future.

BHEL was able to bag the highest-ever order of Rs 112 bn in a single year, despite intense competition from national and global players. BHEL's order book stood at Rs 158 bn as of March 2003 (2.3x FY03 turnover). BHEL also has strong presence in the industrial market segment. The graph below highlights the market share in various industrial segments.

BHEL is taking strong steps to improve overall efficiency and productivity. The company's VRS has so far seen BHEL prune its workforce by 25% to 47,000 in the last four years. The value-add per employee has gone up significantly to Rs 0.7 m in FY03. It has also helped company to improve its bottom line significantly. We expect the trend to continue in the medium-term.

Currently stock trades at Rs 262 with a P/E multiple of 12.5x with price to book value at 1.4x. As compared to ABB, the stock seems to be undervalued.