BHEL – Motilal Oswal Research Report

Motilal Oswal are bullish on BHEL and have recommended a BUY with the following investment rationale:

BHEL is India’s dominant producer of power and industrial machinery and a leading EPC company, established in the late 1950s as the government’s wholly-owned subsidiary. Post divestment, the government currently has an equity stake of 67.7%.

BHEL has an annual installed capacity of 6,000MW. It has formed a tie-up with Alstom and an alliance with Siemens to the manufacture of super-critical 800MW boilers and turbines.

Recent Developments:

Draft Cabinet note circulated by Power Ministry recommends imposing import duty of 5%, CVD of 10% and SAD of 4%, implying effective import duty of around 20%, on power equipment imported under all categories. Presently, imported power equipment for projects of over 1000MW is exempt from all duties under the Mega Power Policy. Domestic manufacturers will also have to pay CVD and SAD. The difference in duties on imported and domestic equipments will be 6-7%.

The Power Ministry also recommends doing away with 15% price preference to domestic manufacturers. BHEL has never used this preference in many years. BHEL stands to benefit from these recommendations, as the price difference between BHEL and Chinese sets will substantially reduce. This will encourage domestic power generators to source equipment from local manufacturers like BHEL & L&T.

BHEL‘S Order backlog at the end of 1QFY11 was Rs1,480b, a book-to-bill ratio of 4.4x TTM, providing the best revenue visibility in our engineering universe. We expect earnings and revenue CAGR of 22% and 24% respectively with margin expansion of 160bp at 22.1% over FY10-12.

After capacity expansion to 20GW by 2012, BHEL‘s capacity will be at par with its Chinese and Korean counterparts, giving BHEL muscle to compete, execute and deliver on time. Our EPS estimates for BHEL are Rs119 for FY11 and Rs147 for FY12. Our price target is Rs2,934, an upside of 19% from current levels. Maintain Buy.