BHEL: Power potential

India's largest engineering company, Bharat Heavy Electricals Limited (BHEL), has again registered a robust increase in the orderbook in the third quarter. Till date, the company has received orders worth more than Rs 45 bn in the period between October-December 2003. This includes the huge Rs 27 bn order that BHEL has received from National Thermal Power Corporation (NTPC) for installing 1,710 MW generation capacity. With this, the order flow for the nine months (April-December) stands at more than Rs 103 bn (1.3x FY03 gross revenues). In this article, let's have a look at the reasons for the strong order inflow and future growth prospects of the company.

(Rs m)	1HFY04	FY04 E
Gross Sales	28,711	84,872
Operating Profits	2,378	11,993
Net Profits	908	6,454
Operating Margins (%)	8.3%	14.1%
Net Profits Margins (%)	3.2%	7.6%

In 1HFY04, the company's topline increased by 20% where as the bottomline saw growth of 54% YoY. Power remained a major contributor to the topline (65% of total revenues). The PBIT margins from power sector remained steady at 21%. But the industrial segment results improved significantly. The topline grew by around 3% but the PBIT margins stood at around 12.4% as compared to 3.2% during 1HFY03. The management has not given any reasons for the significant improvement in the PBIT margins from this segment, but it is likely a result of the heightened industrial activity in the country, as well as BHEL's strategy of focusing on high end work.

BHEL has plans to increase its export contribution to 17% of its total sales from the current 13.5% by FY07. In order to enhance exports, the company is looking to strike an alliance with the Export-Import Bank of India for floating an international financial services company. The JV will take up funding of BHEL's overseas projects, which will enable it to bag large international orders.

The APDRP (accelerated power development reform program) scheme is likely to help companies like BHEL to clean up and strengthen their balance sheet. APDRP has helped power companies like NTPC to get their dues back from SEBs. This will definitely accelerate the generation capacity expansion plans of the power companies, and consequently, will help engineering companies like BHEL to procure more orders.

At the current price levels of Rs 480, the stock trades at 18x expected FY04 earnings. The valuation looks stretched at the current juncture. However, the long-term growth prospects of the company are good, based on the expected addition in power generation capacity by both private and state owned power companies. To put things in perspective, India needs to add 10,000 MW of thermal power generation capacity every year for the next 10 years. NTPC alone has plans to add 20,000 MW over the next decade. Looking at the increasing order inflow, one gets confidence in view of BHEL's track record of installing 65% of the India's thermal power generation capacity.