BHEL: Fairly valued

The company should be able to sustain its robust top line growth on the back of its mammoth order book.

BHEL announced on Tuesday that it secured an order worth Rs 5,600 crore from Prayagraj Power Generation Company, a subsidiary of Jaiprakash Associates. BHEL would be responsible right from the designing stage up to the commissioning of the three units of 660-Mw with supercritical parameters.

What’s important is that the order win reaffirms the faith of the private sector in the company in terms of its ability to deliver on the more advanced supercritical equipment. The movement in BHEL’s stock was, however, not impressive. It closed 1 per cent lower, compared with the 0.29 per cent decline in the Sensex on Tuesday, though it was up 0.96 per cent on Wednesday.

Reason: the market was aware of the order win as the company management had mentioned about the same a month ago, post its September 2009 quarter results, which weren’t so exciting. Because, BHEL’s 24 per cent year-on-year growth in revenues was lower than the 46 per cent revenue growth in the March quarter and 30 per cent in the June quarter. New order inflows also fell 46 per cent to Rs 8,000 crore.

Positively, lower input costs helped push up margins 338 basis points to 18.6 per cent, which analysts expect to hover at 18 per cent levels for 2009-10. Going ahead, analysts say that NTPC is expected to award orders for supercritical power equipment comprising 11 units of 660 Mw each besides another four to five units of 800-Mw each by the first quarter of 2010-11.

In the past, BHEL has managed to secure a majority of NTPC’s orders; the flow of orders from the private sector has also improved recently. Given its integrated operations, technology tie-ups with foreign majors and economies of scale, they expect BHEL to secure a good part of these new orders. This should help sustain interest in the BHEL stock.

Meanwhile, BHEL is on schedule to expand its equipment manufacturing capacity to 15,000-Mw by March 2010 and 20,000-Mw by end of 2011-12, from 10,000-Mw. This should help the company sustain robust topline growth for the next two years on the back of its mammoth order book of Rs 125,000 crore as on September 30, 2009.

However, by 2011-12, the rate of new order inflows may slow down as competition from new entrants such as L&T-Mitsubishi and Bharat Forge-Alstom emerges. The 3-4 new entrants are setting up equipment manufacturing capacity aggregating 15,000-Mw by 2011-12, which along with BHEL’s expanded capacities, would take the industry’s capacity to 35,000-Mw.

By then, the annual demand for power equipment is expected to be 20,000-Mw, assuming the power capacity addition target of 100,000-Mw for the twelfth five-year plan (2012-2017). Thus, the profitability of equipment players may come under some pressure.

At Rs 2,256.40, the stock trades at about 20 times its estimated 2010-11 earnings and has been an underperformer in the last three months.