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Bhel: A review

Dec 17, 2002

When we reported on Bharat Heavy Electricals Limited (Bhel) September quarter performance, the headline read 'Orderbook at Rs 135 bn'. The headline indicated the way we view Bhel's story. This company's performance cannot be judged on a quarter to quarter basis.Bhel is the country's largest engineering company responsible for 65% of the total installed power plants. The company is a major in project implementation and its orderbook of over Rs 135 bn will vouch for its abilities. In the past, it has been criticised for having 'too broad' product portfolio (from transformers to thermal power sets). Higher employee numbers as well as the PSU status has continually seen the stock trading at a discount to its peers on the bourses.

In recent times, Bhel has addressed two of those 3 issues. From FY02, the company has looked at outsourcing some of the manufacturing to free more resources for design and development. Moreover, its employee base has been pruned by nearly 30% from over 62,000 employees in FY99 to 48,000 in FY02. Also, Bhel has made efforts to reduce its dependence on NTPC orders. It has been a successful bidder in international markets against global competition.

Moving away from fundamentals, at present, there is no plan for Bhel divestment. There are other clear cases for disinvestment for Mr. Shourie to look at. In all likelihood, Bhel will continue to be a PSU in the forseeable future. For the investor, this is a positive, as one can look at the company's fundamentals without a bias towards its divestment prospects.

In our view, Bhel will continue to dominate the Indian engineering scene. Its growing expertise in project execution, scope of growth in the power sector and its success abroad (Rs 9.9 bn exports in FY02) make it a sound case for investment. However, management function is government dependent, which is a concern. At Rs 167, the stock trades at 7x our FY03 estimates, Price to book value of 0.8x. Historically, the stock has traded at a P/E band of 7x to 12x. Considering the current valuations, the stock is at the lower end of the spectrum.


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