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BHEL: What the future holds
Sep 30, 2008

FY08 was a noteworthy year for BHEL. The company recorded its highest ever sales & profits numbers and its highest ever order intake, wherein it secured nearly Rs 503 bn worth of orders from both the domestic and international markets. At the end of June 2008, the company’s order backlog stood at Rs 950 bn, which is almost 5 times its FY08 revenue.

The company came out with its FY08 annual report recently. In this article we highlight the key excerpts of the same.

Opportunities ahead
According to the company’s management, the power equipment sector in India is expected to remain strong going forward. The large power capacity additions in the country are likely to keep the power plant equipment manufacturing industry geared up to meet the requirements. In addition, higher rating thermal sets with super critical parameters, ultra high voltage transmission systems, advanced class gas turbines and nuclear power plants are all likely to keep the demand growth steady for the next decade or so. The management also believes that the ageing power plants will improve the opportunities for renovation & modernisation.

The eleventh and twelfth five-year plans envisage generation capacity additions to the tune of 78,577 MW (megawatts) and 82,000 MW respectively, translating as nearly 15,000 MW to 17,000 MW of generation capacity being added every year. However, it should be noted that a significant portion of the orders of the eleventh five-year plan might have been placed, as such, making BHEL one of the largest beneficiary of these investments.

Coming to competition, while no player in the domestic market comes close to BHEL’s scale of operations, to maintain its edge, the company has introduced new rating thermal sets (with technology tie-ups) of 270 MW, 525 MW and 600 MW in subcritical range.

Key concerns
While the company has built up its order backlog to its all time high, all may not seem very hunky-dory for it going forward. BHEL has been blamed for delaying projects in the past. As it does not have the adequate resources to execute the projects on time, execution risks are the key concern for the company going forward.

Further, its manpower issues are also something that the company needs to address going forward. People, especially from the design department, are core to the engineering business as it involves key technological skill-sets. Unlike the past, most of the global engineering majors are looking at India and China for growth opportunities and competition for talent. In this sense, manpower issues are only going to increase for BHEL.

What to expect?
At the current price of Rs 1496, the stock is trading at 15.1 times our FY11 estimated earnings. While the strong order book provides strong revenue visibility going forward, the management believes that the company’s future success will be dependent on its ability to execute projects in time. The company increased its installed manufacturing capacity in December 2007 to 10,000 MW per annum. As part of its capacity augmentation plan, the company in its second phase is further expanding its capacity to 15,000 MW per annum, which is likely to be completed by December 2009. This will not only help the company in improving its execution skills, but the benefits of this expansion will further boost its revenues going forward. Further, the company has also planned to increase its transmission and distribution equipment portfolio to 45,000 MVA per annum from 20,500 MVA per annum.

BHEL’s product portfolio majorly constitutes of power equipment, as such making it highly dependant on the growth in investments in the power generation sector. Recognising the same, the company plans to give strong focus towards its to non-power plant business areas, which include its entry into coach building for Indian Railways, bulk ordering for electric locomotives, refurbishment and upgradation of onshore drilling rigs and development of disc insulators for 800 kV HVDC applications, amongst others. We maintain our positive view on the stock from a 2 to 3 years perspective.

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