BHEL: Plenty of orders in hand

With a strong order book, the engineering major is on track to post some strong numbers in 2009-10.

The BHEL management believes it can grow revenues at between 20 and 25 per cent in the current year. That may be a tad slower than the nearly 30 per cent achieved in 2008-09 but the growth is nonetheless strong in a difficult environment. What’s probably giving the management the confidence to visualise these growth rates is the very strong order inflow, of close to Rs 60,000 crore, during 2008-09.

BHEL’s provisional numbers for the March 2009 quarter are more or less in line with expectations — if operating margins were somewhat disappointing at just 17 per cent, it was because the company needed to provide for more wages. While revenues for 2008-09 are expected to come in at just over Rs 25,000 crore, the top line this year could be in the region of Rs 31,000 crore. Last year’s net profits are expected to be around Rs 3,500 crore and analysts believe that it should not be difficult for BHEL to grow net profit by a compounded 20 per cent in the next three years given that expenses on wages would be lower and because prices of raw materials are easing. The BHEL stock has rallied smartly in recent weeks as has Larsen and Toubro, which was beaten down, because of concerns about the order book — almost three-fourths of the orders are from private sector parties. BHEL, on the other hand gets a fair share of its orders from the government and chances of cancellations are lower. Of late, it has managed to bag orders from well-funded private IPPs and some state utilities and at Rs 1,532, the L&T stock trades at 17 times estimated 2009-10 earnings.

L&T, meanwhile trades at around 14 times estimated 2009-10 earnings partly because the Street has also been unhappy with L&T’s intention to pick up buy Satyam Computers. Although BHEL may be more expensive, it’s a better play on the revival in the economy. After all, it has an order backlog of over Rs one lakh crore, close to 5 times the firm’s 2007-08 revenues.