BHEL

OVERSEAS BUSINESS

BHEL, ranking among the major power plant equipment suppliers in the world, is one of the largest exporters of engineering products & services from India. Over the years, BHEL has established its references in more than 70 countries worldwide, ranging from the United States in the West to New Zealand in the Far East. BHEL's export range covers individual products to complete Power Stations, Turnkey Contracts for Power Plants, EPC Contracts, HV/EHV Sub-stations, O&M Services for familiar technologies, Specialized after-market services like Residual Life Assessment (RLA) studies and Retrofitting, Refurbishing & Overhauling, and supplies to manufacturers & EPC contractors. BHEL has assimilated and updated/adopted the state-of-the-arttechnologies in the Power and Industrial equipment sectors acquired from world leaders. BHEL has successfully undertaken turnkey projects on its own and possesses the requisite flexibility to interface and complement international companies for large projects, and has also exhibited adaptability by manufacturing and supplying intermediate products to the design of other manufacturers and original equipment manufacturers (OEMs). The success in the area of rehabilitation and life extension of power projects has established BHEL as a reliable alternative to the OEMs for such power plants.

QUALITY ASSURANCE

Towards meeting its Quality Policy, BHEL is using the vehicle of Quality Management Systems, which are certified to ISO 9001:2000 series of Standards by Internationally acclaimed certifying agency, BVQI. Corporate Quality and Unit level Quality structure enables requisite planning, control and implementation of Company-wide Quality Policy and Objectives which are linked to the Company's Vision statement. Corporate Quality derives strength from direct reporting to Chairman and Managing Director of the Company.

Calibration and testing laboratories of BHEL are accredited under the National Accreditation Board for Calibration and Testing Laboratories (NABL) scheme of Laboratory Accreditation, which has got mutual recognition with Asia Pacific Laboratory Accreditation Conference and International Laboratory Accreditation Conference. As a result of its thrust on quality and technology, BHEL enjoys national and international recognition in the form of Product Certification by International Bodies like ASME, API etc. and Plant Approvals by agencies like Lloyds Register of Shipping, U.K., Chief Controller of Explosives India, TUV Germany etc. In its movement towards Business Excellence and with the objective of achieving International level of Quality, BHEL has adopted European Foundation for Quality Management (EFQM) model for Business Excellence. Through this model and annual selfassessment exercise, BHEL is institutionalising continuous improvement in all its operations.

Overview

Bharat Heavy Electricals Limited (BHEL) is Indias largest engineering and manufacturing enterprise. It is engaged in producing Energy and infrastructure machinery. BHEL was established more than 40 years ago and today it has wide network of 15 manufacturing divisions. BHELs operations are organised around three business sectors, namely Power, Industry including Transmission, Transportation and Renewable Energy and Overseas Business. This enables BHEL to have a strong customer orientation, to be sensitive to his needs and respond quickly to the changes in the market. It has an annual installed capacity of 15,000 MW in BTG segment. BHEL manufactures and supplies some of the most important products in power generation sector.

INVESTMENT THESIS
HIGH GROWTH SECTOR: The sector has huge opportunity in developing nation like India. Government is also committed to provide all support for infrastructure development. Power generation and Infrastructure is still in progressive stage and lots of things need to be done. Today, many energy projects are lined up to meet the power demand in India. BHEL which is pioneer in producing Energy and infrastructure machinery and largest manufacturer

of power equipments in the country is poised to take advantage of this demand with superior quality and healthy balance sheet.

STRONG ORDER BOOK: BHELs current order book stands at Rs. 1576.1 bn. The management has maintained its guidance of Rs 60,000 cr of order inflows during FY11 (61% of guidance met till Q3FY11). Q4FY11 is also expected to be on line. Strong Order book will help company to generate steady revenue and PAT for next 3 years with support of good cash flow. This Order book estimates the growth of 25% CAGR till FY14.

Cutting Cost & Maintain Margin: Currently, BHEL is engaged in many R&D to maintain margin and reduce operational cost. Recently, BHEL has started in Joint-venture with SAIL for manufacturing of critical input such as CRGO. Company also working to increase its vendor base and reduce content of import for supercritical sets. In Addition, the board of BHEL has approved the companys plan of starting a non-banking financial company (NBFC) to finance power projects.

Further Expansion: Company is working on an agreement with NPC (Nuclear Power Corporation) and Toshiba to supply turbines to an upcoming nuclear project. BHEL also joined hands with Abengoa of Spain to develop Concentrated Solar Power projects in India. In Addition, Company has recently signed an agreement with GE for a 10-year licensing pact to manufacture high-end oil and gas compressors to be marketed in India and South Asia. Company is all set to enter into manufacturing of renewable energy generating equipments with JV with BEL (Bharat Electronics Ltd). Although Company has strong orderbook till FY13 but Due to competition with Chinese market, BHEL is working to expand its business with new horizon.

Steady Financial Performance: BHEL sales turnover stands @ 9,023.32 cr for Q3FY11 compare with 7,229.22 Cr for Q3FY10. Power Segment grew by 27.5% YoY and Industry segment grew 18.9% YoY. EBIT margins witnessed a decline for both power and industry segments but margin has expanded. Its APAT stood at Rs. 13432.3 mn, registering a growth of 25.2% YoY. Net Profit Margin (%) remained stable around 12%-14% YoY for last 5 years. Low Debt, Good Cash flow, Stable ROW & ROCE makes a safe long term bet.

VALUATION
With good set of number in Q3 of FY11 and good inflows of order book in Q4 of FY11, EPS is expected to be around 111 for FY11. At Current price of Rs. 1975, Stock is trading @ 17.7xFY11 earning of Rs. 111 and 14x on FY12 earnings of Rs. 139. With Strong Order Book, Stable profit margin, Good Cash Flow, experienced management, BHEL is trading at attractive valuation. Long Term Investors can BUY @ 1975 till 1900 for Target 2710 in next 12-15 Months.

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NTRODUCTION BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77. INTRODUCTION BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHEL 's 14 manufacturing divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18 regional offices, enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centres. INTRODUCTION BHEL has Installed equipment for over 90,000 MW of power generation -- for Utilities, Captive and Industrial users. Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Powerprojects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network. Supplied over one million Valves to Power Plants and other Industries.

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CONTRIBUTION TO INDIAN POWER SECTOR

The company has 180 products under 30 major product groups that cater to the

needs of the core sector like power, industry, transmission, transportation, defence, telecommunications and oil business.

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BHEL's ability to acquire modern technology and make it suitable to Indian

conditions has been an exceptional strength of the company. Strong relationship with NTPC is a strength as NTPC is planning a capacity

expansion of Rs. 52 bn and based on the past, 85% of NTPC projects have been bagged by BHEL. The company also enjoys purchase price preference.

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Huge investment in R&D Merger & Acquisition The company has taken over the Management & Control of

Bharat Pumps & Compressors Ltd and completely taken over M/s- Bharat Heavy Plate & Vessels Ltd STRENGHTH 3.

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PSU status is a big weakness for BHEL as it is subject to their rules and regulations

and is forced to carry a huge amount of labor force, which it is not able to retrench. The company offers very stringent credit facilities to the customers and this is a

weakness when compared in the face of rising competition. On the other hand their customers in the power segment, have a huge amount of receivables standing against their name in the company's balance sheet. This is a major weakness for the company.

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WEAKNESS 4.

The company is vertically integrated, which could have been avoided by outsourcing

its components for power generation and transmission. This could have reduced the cost.

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The power sector reforms are expected to pick up in the near future in India, which

would directly benefit BHEL. Increase in defense budget will increase the top line for the company. NTPC is planning additional capacities to the tune of 2,800 MW, at a cost of Rs 52

bn. BHEL could benefit a lot as it has happened in the past that significant portion of the project of NTPC is handled by BHEL. Nearly 85% of the NTPC projects were assigned to BHEL only

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OPPURTUNITY 5.

Huge order for setting up of nuclear power plant

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The global trend of consolidation has already resulted in a fall in turnover of the

company and this will prove to be a major threat in the years to come as well. The company is dependent on NTPC to a great extent. Recently, the government has permitted the import of second hand capital goods

that are 10 years old without the need for a license. This move will definitely increase competitive pressures for BHEL. THREAT 6. OBJECTIVES SURVIVAL Existence in the market GROWTH To ensure a steady growth by enhancing the competitiveness edge of BHEL in existing business, new areas, and international operations so as to fulfill national expectations for BHEL. PROFITABILITY To provide a reasonable and adequate returns on capital employed, primarily through improvements in operational efficiency, capacity utilization and productivity, and generate adequate internal resources to finance the companys growth. GENERAL

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INANCIAL ANALYSIS Business Outlook and Valuation BHEL has started FY10E on impressive order backlog of Rs.1170bn which is ~4.3x of FY09 revenue. The company witnessed impressive order inflows of Rs.596bn in FY09 and the management remains confident about the order inflow of Rs.500bn in FY10E. We believe the company would continue to perform well in FY10E and would maintain its market share at least for next 2-3 years. We also view BHEL initiative in nuclear power and super critical segment as key positives for future growth. We have introduced FY11E earnings and expect BHEL to report it to grow at a CAGR of 32% over a period of FY09E- 11E which is fairly reflected in the valuation. BHEL currently trades at 17x and 14x on FY10E and FY11E earnings respectively. We recommended the stock on 5th February 2009 post Q3FY09 results with a target price of Rs.1437 and we had mentioned the stock would be fairly valued at this price. The stock has already achieved our target price. Although we remain positive on the long term prospects of the company and considering the order book position we remain confident about its earnings growth as well, but as the stock trades at high multiple of 17x on FY10E we believe the stock is fairly valued at this price and thus we recommend a Reduce with same target price of Rs.1437. FINANCIAL ANALYSIS

Govt to offload 5% equity in BHEL to raise Rs 4,500 cr

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NEW DELHI: The government is likely to divest 5 per cent equity in state-owned engineering giant BHEL as part of the exercise to raise Rs 40,000 crore from disinvestment during the current financial year. The stake sale in BHEL is likely to yield the government about Rs 4,500 crore at existing market prices. "The board of directors of the company has recommended the disinvestment of 5 per cent of the paid-up equity of BHEL out of the government of India's shareholding," Bharat Heavy Electricals Ltd (BHEL) said in a filing to the BSE. The government currently holds 67.72 per cent equity in BHEL, which will come down to 62.72 per cent following the disinvestment. The company further said that 10 per cent of the equity to be offloaded under the disinvestment programme would be reserved for employees. BHEL, meanwhile, has also decided to split its equity shares of Rs 10 face value into five equity shares of Rs 2 each. Shares of BHEL fell by over 7 per cent to Rs 1,923.8 on the Bombay Stock Exchange today.

During the current fiscal, the government has already raised Rs 1,162 crore through the divestment of a 5 per cent stake in Power Finance Corporation in May. A follow-on public offer by SAIL is likely to hit the market next month and another issue by ONGC in July. NEW DELHI: The government is likely to divest 5 per cent equity in state-owned engineering giant BHEL as part of the exercise to raise Rs 40,000 crore from disinvestment during the current financial year. The stake sale in BHEL is likely to yield the government about Rs 4,500 crore at existing market prices. "The board of directors of the company has recommended the disinvestment of 5 per cent of the paid-up equity of BHEL out of the government of India's shareholding," Bharat Heavy Electricals Ltd (BHEL) said in a filing to the BSE