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BHEL: What the future holds? - Views on News from Equitymaster
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BHEL: What the future holds?
Nov 19, 2008

For the 10th plan period (FY03-FY07), a power generation capacity addition of 41,110 MW (Megawatts) was targeted by the government. But the actual capacity addition during the period turned out to be only 21,180 MW, just above 50% of the targeted figure. This in spite of the management of BHEL, India’s largest power generation equipment maker, in its 2004 Annual Report saying, “Unlike in the previous plans, the implementation rate of the 10th plan is expected to be very high.”

The National Electricity Policy envisages “Power for all by 2012” and per capita availability of power to be increased to over 1,000 units by 2011-12. To achieve this, a total capacity addition of about 100,000 MW would be required during 10th and 11th (FY08-FY12) plan periods.

Based on the 10th plan actual capacity addition of 21,180 MW, a capacity addition of around 78,500 MW has been proposed during the 11th plan, the implementation of which remains the big question mark.

BHEL has historically had a market share of 65% of the power generation equipments installed in the country in any given year. That said, as is clear from the above, using the ‘proposed’ figures for benchmarking estimated earnings of companies like BHEL would not serve as a reliable guidepost.

The talks of the imminent slowdown in the economy due to the overall global slowdown and liquidity crunch in the system will definitely have a strong bearing on the companies in the capital goods sector, and BHEL is no exception.

However, if one were to take a 3 to 5 years view, growth for BHEL is expected to be strong even if the capacity addition targets are not to be achieved in full. Short tem liquidity crunch notwithstanding, the government will not cease to encourage the implementation of its proposal of 78,500 MW capacity addition plan during the period of FY08 to FY12. BHEL is going to be a key beneficiary of this due to its large market share of the power generation capacity installation in the country.

This is however not without assuming that the company’s share will continue to come down on account of increasing competition from other local (like L&T) and international (mainly Chinese) manufacturers. BHEL already has a huge order backlog, which lends good visibility to its revenues though its profits will depend on the way the company handles the execution of these orders and its costs. Overall, given the stock’s valuations, we maintain our positive view on the same from a 2 to 3 years perspective.

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