Buy BHEL: DSP Merrill Lynch

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DSP Merrill Lynch has recommended buy rating on Bharat Heavy Electricals.

 

DSP Merrill Lynch report on Bharat Heavy Electricals:

 

Robust FY07: Order book +47%YoY; Sales +29%; PAT +42%

 

An order book (Rs 550 billion/USD 13 billion) growth of 47%YoY, expanding margins and a PAT growth of 42%YoY, which was ahead of consensus though in line with MLe, characterize BHEL's FY07 results. FY07 reinforces our stand on BHEL being the core beneficiary of the momentum in the power capex. Buy, PO of Rs2760.

 

Order Inflow +88%, drives Backlog to Rs550bn; Margins Up

 

Believe market should be reassured with 88%YoY growth in order intake to Rs356bn led by a flurry of new orders (Table 1). This led to a 47%YoY growth in backlog. Sales at Rs187bn (+29%YoY) and PAT at Rs23.8bn (+42%YoY), were in line with MLe but 3% ahead of consensus. Note that 4Q PAT was after making ~Rs700mn prov. for wage hike and ~Rs2.2bn for post-retirement medical benefits as per AS15R. Derived EBITDA margins look expanded to 24% in 4Q v/s 21.7%.

 

Guide for US$10bn revenues by FY12E - CAGR of 19%

 

BHEL guided for USD 10bn revenues by FY12E, harbinger to BHEL's confidence despite increasing competition. To achieve this, it plans to raise capacity by 50% to 15GW p.a. by FY12E at a capex of Rs32bn in XI plan v/s 12bn in X plan.

 

A look beyond financials points to more exciting times ahead

 

With utilization at 83.5%, BHEL utility sets (200-500MW) performed very well - competitive advantage v/s Chinese; & B) Building a solid platform - R&D spend +58%, productivity (value added/employee) +30%, EVA +42%, Capex +16%.

 

Reiterate Buy on improving pipeline and competitiveness

 

We expect the stock to outperform as the company addresses key concerns on Chinese competition, super-critical orders (likely in 2007) and improved competitiveness through operating leverage - ~67% capacity expansion with <10% rise in labor.