Buy BHEL; target Rs 400: Hedge Equities

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Buy BHEL; target Rs 400: Hedge Equities

Hedge Equities is bullish on Bharat Heavy Electricals (BHEL) and has recommended buy rating on the stock with a target price of Rs 400 in its December 9, 2011 research report.

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Hedge Equities is bullish on Bharat Heavy Electricals (BHEL) and has recommended buy rating on the stock with a target price of Rs 400 in its December 9, 2011 research report.

"BHEL has grown in stature over the years with continued inflow of orders, manufacturing prowess, continued thrust on technology leading to a strong presence in domestic and international markets as a major supplier of power plant equipments besides establishing substantial inroads in select segment of products in Industrial sector and Railways. BHEL has been augmenting its capacity and capability and has already enhanced its power generating equipment manufacturing capacity from 6000 MW per annum in 1999-2000 to 15,000MW of now. It is further planned to increase the capacity to 20,000 MW per by March, 2012. Besides capacity augmentation in the areas of Thermal, Gas, Hydro and Nuclear, other major areas of investment include the facilities for Nuclear Turbines upto 700/ 1000 MW, Advanced Class Gas Turbines, 765 KV Transformers and augmentation of transformer capacity from 20500 MVA to 45000 MVA.

In Power generation segment, BHEL is the largest manufacturer in India supplying wide range of products & systems for thermal, nuclear, gas and hydro-based utility and captive power plants. BHEL has proven turnkey capabilities for executing power projects from concept-to-commissioning. BHEL supplied utility power generating sets have crossed the landmark of 1, 00,000 MW and continue to maintain the record of nearly two-third of the overall installed capacity and around three-fourth of the power generated in India. BHEL supplies steam turbines, generators, boilers and matching auxiliaries up to 800 MW ratings, including sets of 660/700/800 MW based on supercritical technology. BHEL has facilities to go up to 1000 MW unit size. BHEL is the only Indian company capable of manufacturing large-size gas-based power plant equipment, comprising of advanced-class gas turbines up to 289 MW (ISO) rating for open and combined-cycle operations.

BHEL has registered a robust growth in revenue, at a CAGR of 23% between FY 2007 and FY2011. During 2011, it has seen a surge of 27% over the previous year to reach Rs 42,329 Crore from Rs 34,613.43 crore a year ago. Meanwhile, the profit after tax, during the five year period, grew at a CAGR of 25.6% to settle at Rs.6011.2 crores. For FY11, the latter had witnessed a robust growth of 37.3%. The strong performance in the FY11 was mainly aided by changes in the company's accounting policies that the company introduced in 3QFY11. The core operating profit of the company, for the year, has increased by 45.36% YoY at Rs 8,466.97 crore as compared to Rs 5,824.96 crore a year ago. Among the other significant expenditures, the employee cost decreased by 0.5% YoY at Rs 5,466.30 crore and the other expenditure increased by 101.31% YoY at Rs 5,609.49 crore. Consequently, operating margins were stood at 20.22% as compared to 17.56% yoy.

Our DCF model with a discount rate of 15.3% values the company at Rs 400 for FY13 taking into account the main component of the expenditure book i.e. raw material cost as 52% of sales which seems to be more conservative compared to the previous years' figure and net sales growth at 15% which is the lowest of the last 5 years. We initiate coverage on the stock with a "Buy' recommendation for those who have a moderate to aggressive risk appetite since the valuation as well as the future looks impressive. PE Valuation looks attractive BHEL is currently trading at 9.68x its FY13E EPS of Rs.30.08, which looks impressive. The Company had an EPS of Rs.24.73 for FY11 and expects the same to be Rs. 26.55 and 30.08 for FY12E and FY13E respectively. Recently, the stock price has come down drastically making the valuations attractive mainly on the back of some global macro developments as well as some weakness seen in the industry. With the concerns started slackening, investors with a long term point of view can make use of the opportunity and should invest proportionately on every dips so that the cost can be brought down," Hedge Equities research report.

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