ENAM DIRECT

EQUITY RESEARCH
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BHEL
FY13: Spillover Boost to Weak Order Inflow
BHELs FY12 provisional net profit of Rs 69 bn was ahead of our estimate by 14%, driven by better execution. However, order inflow at Rs 221 bn (down 64%) was lower than our estimate of Rs 350 bn due to delays in finalization of NTPC bulk tender (660 MW) and RRVUNL order. These orders along with NTPC bulk tender (800 MW) would result in order inflow of Rs 200-250 bn in Q1FY13E. We expect remaining quarters to be lackluster in comparison given the shrinking BTG equipment market (15 GW in FY13E from 30 GW in FY11). Push-outs from FY12 to boost FY13 inflow: We are skeptical on BHELs order inflow expectation of Rs 500 bn in FY13, as majority of 20-22 GW projects in pipeline dont have either coal linkage or environmental clearance. However, we raise our FY13E inflow to Rs 451 bn from Rs 380 bn to factor in order push-outs from FY12.

CMP (Rs) Target price (Rs) Potential upside

Stock data No. of shares (mn) FV (Rs) Market cap (Rs bn) 52 week high/low (Rs) Avg. daily vol.* (shares) BSE Code NSE Code Bloomberg code Reuters Code

264 224 (15%)

2,448 2/646.7 450/225 5.5 500103 BHEL BHEL IB BHEL.BO

COMPANY UPDATE

Rising concerns on backlog quality: 15-20% of BHELs 60 GW backlog is slow moving. Channel checks indicate 4 GW of orders from private players are at risk of cancellation as customers are negotiating with Chinese vendors to help them secure financial closure with Chinese banks. NTPCs decision to consider bulk tender capacity addition as part of XIIIth Plan is also a cause for concern (10% of BHELs FY13E backlog of Rs 1,327 bn). Bulk tender pricing indicates margin erosion for BHEL: Prices quoted by BGR (Rs 14 mn/MW) in recent NTPC bulk tender has become a new benchmark. As breakeven level for BHEL is Rs 16 mn/MW, we expect execution of these orders to erode margin to <14-15% from FY15 from current 18-19%. Maintain SELL on a) EPS decline to Rs 17 in FY15E (Rs 28 in FY12) on stagnating revenue on weak inflows, margin erosion; b) rising working capital-sales (23% in FY12 vs. 8% in FY11). Our TP stands at Rs 224 (14x FY15E EPS discounted at 15% pa).

* BSE & NSE 6 monthly

Shareholding (%) Dec-11 Promoter FIIs MFs / UTI Banks / FIs Others 67.7 12.2 5.9 7.7 6.5 QoQ Chg 0.0 (0.6) (0.6) 0.8 0.5

Note: Rajasthan Rajya Vidyut Utpadan Nigam Limited (RRVUNL)

Price performance

120 100 80 60 40 Jan-11 Jul-11 Jan-12 BHEL Sensex

Source: Cline, ENAM Research

Financial summary
Y/E Mar 2011 2012E 2013E 2014E Sales (Rs mn) 397,227 481,264 495,988 461,193 PAT (Rs mn) 53,526 68,873 57,117 51,333 Consensus EPS* (Rs) 25.9 26.2 26.4 EPS (Rs) 21.9 28.1 23.3 21.0 Change YoY (%) 18.6 28.7 (17.1) (10.1) P/E (x) 9.4 11.3 12.6 RoE (%) 33.1 33.7 23.3 18.6 RoCE (%) 49.4 48.7 33.6 26.9 EV/EBITDA (x) 5.9 7.1 7.7 DPS (Rs) 7.3 8.4 9.4 9.4

Source: *Consensus broker estimates, Company, ENAM estimates.

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BHEL

FY12 provisional result highlights

(Rs bn) Sales PBT Net Profit EPS (Rs) Order inflows FY12 493 100 69 28.1 221 FY12E 476 87 60 24.6 350 Variation 3.7 14.5 13.9 14.1 (36.9) FY11 404 80 54 22 605 YoY 22.1 24.6 28.3 28.5 (63.5)

Source: Company, ENAM Research

Q4FY12 provisional result highlights

(Rs bn) Sales PBT EPS Order inflows Source: Company, ENAM Research 4QFY12 201 51 14 80 3QFY12 109 19 5.2 (28) 4QFY11 162 34 9 240

BHEL Order Inflow Push-out of NTPC bulk tender for 660 MW and RRVUNL order to boost FY13E inflow. These orders along with NTPC bulk tender for 800 MW to result in Q1FY13 inflow of Rs 200-250 bn worth of orders
700 600 500 400 300 200 100 0 FY13E FY14E
FY15E

(Rs bn)

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11
FY13E

Source: Company, ENAM Research

Expect BHELs EBITDA margin to erode to 14-15% from FY15 on execution of low margin orders based on pricing in recent NTPC bulk tenders (Rs 14 mn/MW). BHELs breakeven pricing is Rs16 mn/MW

BHEL EBITDA margin to trend down to 15% by FY15E

25 20 15 10 5 0 FY14E FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (%)

Source: Company, ENAM Research

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FY12

BHEL

Working capital to sales has risen to 23% in FY12 from 8% in FY11. We expect further increase in working capital/sales ratio to 37% in FY13 due to rising receivables

Rising Working Capital/Sales for BHEL

60 50 40 30 20 10 0 (10) FY13E FY14E FY15E FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 (%)

Source: Company, ENAM Research

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