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SYNOPSIS

BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector.

BHEL is a power plant equipment manufacturer with a current capacity to supply 15 GW per annum. The company targets to increase capacity to 20GW by 2012.

Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 19% over 2010 to 2013E respectively.

Bharat Heavy Electricals Limited (BHEL) has made its maiden entry in the Ukrainian market with an order for a Steam Turbine Generator (STG) package. Valued at nearly Rs.400 Million.

During the quarter, the company has reported Net Profit increased to Rs.14326.10 million from Rs.14032.30 million in previous year same quarter.

Years Net sales EBITDA Net Profit EPS P/E

FY 11 424955.10 96045.20 60112.00 122.80 2.12

FY 12E 489719.02 101950.90 64180.18 26.22 9.92

FY 13E 548485.30 115408.38 72595.12 29.66 8.77

Stock Data:

Sector:

Capital Goods/Electrical Equipment

Face Value Rs. Rs.2.00

52 wk. High/Low (Rs.) 450.20/225.00

Volume (2 wk. Avg.) 1297000

BSE Code 500103

Market Cap (Rs.In mn) 704908.8

Share Holding Pattern

1 Year Comparative Graph

BHEL BSE SENSEX

C.M.P : Rs.288.00 Target Price : Rs.330.00 Date : 15th Feb 2012 BUY

BHARAT HEAVY ELECTRICALS LTD

Result Update: Q3 FY 12

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Peer Group Comparison

Name of the company CMP(Rs.) Market

Cap.(Rs.Mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%)

BHEL 288.00 704908.8 122.80 2.12 0.63 311.50

Siemens 774.60 263592.4 19.76 39.20 6.91 300.00

Crompton Greav 143.70 92182.3 9.13 15.74 4.03 110.00

Investment Highlights

Q3 FY12 Results Update

Bharat Heavy Electricals Ltd disclosed results for the quarter ended Dec 2011.

Net sales for the quarter moved up 19% to Rs.107430.80 million as compared to

Rs.90233.20 million during the corresponding quarter last year. During the

quarter, the company has reported Net Profit increased to Rs.14326.10 million

from Rs.14032.30 million in previous year same quarter. The Basic EPS of the

company stood at Rs.5.85 for the quarter ended Dec 2011.

Quarterly Results - Standalone (Rs in mn)

As At Dec-11 Dec-10 %change

Net sales 107430.80 90233.20 19

PAT 14326.10 14032.30 2

Basic EPS 5.85 28.67 (80)

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Basic EPS of the company stood at Rs. 5.85

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Break up of Expenditure

Expenditure for the quarter stood at Rs.86626.30mn, which is around 25%

higher than the corresponding period of the previous year. Raw material cost of

the company for the quarter accounts for 60% of the sales of the company and

stood at Rs.64882.42mn from Rs.50856.90mn of the corresponding period of the

previous year. Staff cost decreased 1%YoY to Rs.13376.8mn from

Rs.13486.60mn and accounts for 12% of the revenue of the company for the

quarter.

OPM and NPM for the quarter stood at 21% and 13% respectively from 25% and

16% respectively of the same period of the last year.

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BHEL-developed India's first Ultra High Voltage AC 1200 kV Transformer

Bharat Heavy Electricals Limited (BHEL)’s sustained focus on developing new

technologies and products through in-house R&D initiatives with the successful

commissioning of India’s first 1200 kV Ultra High Voltage Alternating Current

(UHVAC) Transformer of 333 MVA rating.

The country’s first 1200 kV transmission line, the pinnacle of voltage levels in

the world, has been charged from BHEL's 1200 kV UHVAC transformer, at Bina

in MP. This is the first leap of the country towards excellence in UHVAC

systems and the establishment of the first commercial 1200 kV transmission

system in India is a rare accomplishment in the world.

BHEL further consolidates in the CIS region, Forays into Ukraine with

maiden order

Bharat Heavy Electricals Limited (BHEL) has made its maiden entry in the

Ukrainian market with an order for a Steam Turbine Generator (STG) package.

The contract for 27 MW STG package has been placed on BHEL by

ArcelorMittal group. Valued at nearly Rs.400 Million, the power generating

equipment will meet the Captive Power requirements of ArcelorMittal’s steel

plant at Kryviy Rih in Ukraine. BHEL’s scope of work in this contract includes

design, engineering, manufacture, supply and supervision of erection and

commissioning of 27 MW Steam Turbine & Generator Package including the

state of the art Controls and Instrumentation (C&I).

Company Profile

BHEL is the largest engineering and manufacturing enterprise in India in the energy

related sector. BHEL manufactures over 180 products under 30 major product groups

and caters to core sectors viz., Power Generation & Transmission, Industry,

Transportation, Telecommunication, Renewable Energy, etc. The company has 14

manufacturing divisions, four Power Sector regional centers, over 100 project sites,

eight service centers and 18 regional offices. BHEL has installed capacity of 15GB in

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power segment. BHEL supplied equipments account for more than 65% of the total

installed Thermal Generating capacity in India and contribute approx. 73% of the

Total Power Generation in the country.

Business Area

1. Power generation

Power Generation Sector comprises Thermal, Gas, Hydro and Nuclear power plant

business. BHEL-supplied sets account for 85,786 MW or around 64% of the total

installed capacity of 1,34,697 MW in the country. Significantly, these sets generated

an all-time high 454.59 Billion Units of electricity contributing 73% of the total power

generated in the country. The cumulative capacity of projects installed worldwide has

crossed 15GB. BHEL has proven turnkey capabilities for executing power projects

from Concept to Commissioning.

The company has introduced new rating thermal sets of 270 MW, 525 MW & 600 MW

in subcritical range and possesses the technology & capability to produce large

capacity thermal sets with super critical parameters and gas turbine-generator sets.

Co-generation and Combined cycle plants have been introduced to achieve higher

plant efficiencies. To make efficient use of the high ash content coal available in India,

BHEL also supplies Circulating Fluidized Bed Combustion (CFBC) boilers for thermal

plants. The Company manufactures 220/235/500/540 MWe, nuclear turbine-

generator sets. Custom-made hydro sets of Francis, Pelton and Kaplan types for

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different head-discharge combinations are also engineered and manufactured by

BHEL.

The Company has proven expertise in Plant Performance Improvement through

Renovation, Modernization and Uprating of a variety of power plant equipment,

besides specialized know-how of residual life assessment, health diagnostics and life

extension of plants. BHEL built thermal sets consistently exceed the national average

efficiency parameters and have achieved the highest-ever Plant Load Factor (PLF) of

80.4% during 2007-08, which is 2.5% higher than the national average. Operating

Availability (OA) was also he highest-ever at 86.7%.

BHEL is one of the few companies worldwide, involved in the development of

Integrated Gasification Combined Cycle (IGCC) technology which would usher in clean

coal technology. BHEL has set up Asia’s first 6.2 MW IGCC power plant with an

indigenously designed pressurised fluidised bed gasifier. The company has also signed

an MoU with APGENCO for setting up a 125 MW IGCC plant at Vijayawada.

a) Transmission:

BHEL is today a well established player in the field of power transmission with some

major products and systems in its range of manufacturing and supply. Transmission

Business Group in BHEL undertakes projects on turnkey basis covering the complete

engineering, procurement, supply, construction, commissioning and after sales,service

for AC switchyards/substations upto 400KV with capability upto 765 kV capability to

conduct System studies as required for above business. BHEL today is the market

leader in turnkey substation business of 220/400 KV class and is also the largest

transformer manufacturer in the country with the distinction of being the only Indian

company in the field of HVDC technology.

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b) Future Power Generation & Transmission requirements in India

Government of India has ambitious plans of adding new generation capacities of

77577 MW in the XIth 5-year plan (2007 to 2012) and another 82000MW is projected

to be added during the XIIth 5 year plan (ending 2017). The associated transmission

system for evacuation of power has been planned and inter-regional transmission

capacity has been planned to be enhanced to 37150 MW by end of XIth plan i.e.

March 2012.Major investments are planned for building high capacity transmission

highways consisting of 400KV and 765KV transmission lines and HVDC bipoles to

evacuate power from North Eastern region and Eastern regions of the country.

POWERGRID, the Central Transmission Utility in the country is also planning to move

to next higher voltage for the grid by setting up the first 1200KV transmission line by

2012-13. POWERGRID has projected that by 2025-26 there shall be around 35 nos

1200KV substations having 100,000 MVA transformation capacity.

2. Industries

BHEL manufactures and supplies major capital equipment and systems like Captive

power plants, Centrifugal compressors, Drive Turbines, Industrial boilers and

auxiliaries, Waste heat recovery boilers, Gas turbines, Pumps, Heat exchangers,

Electrical machines, Valves, Heavy castings and forgings, Electrostatic precipitators,

ID/FD fans, Seamless pipes etc. to a number of industries, like metallurgical, mining,

cement, paper, fertilizers, refineries & petro-chemicals etc., other than power utilities.

BHEL has also emerged as a major supplier of controls and instrumentation systems,

especially distributed digital control systems for various power plants and industries.

3. Transportation

Most of the trains in Indian Railways, whether electric or diesel powered, are equipped

with BHEL’s traction propulsion system and controls. The systems supplied are both

with conventional DC drives and state-of-theart AC drives. India’s first underground

metro at Kolkata runs on drives and controls supplied by BHEL. The company also

manufactures complete Rolling stock i.e. Electric locomotives up to 5000 HP and EMU

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coaches and Diesel Electric locomotives from 350 HP to 3100 HP for both mainline

and shunting duty applications.

BHEL also undertakes retrofitting and overhauling of rolling stock. In the area of

urban transportation, BHEL is geared up for turnkey execution of electric trolley bus

systems, light rail systems and metro systems. BHEL is contributing to the supply of

electrics for EMUs for 1500V DC & 25 kV AC to Indian Railways. Almost all the EMUs

in service in India are with the electrics manufactured and supplied by BHEL.

4. Renewable Energy

BHEL has been manufacturing and supplying a range of Renewable Energy systems

and products. It includes Solar Energy systems viz. PV modules, PV power plants,

Street lighting, Solar pumps and Solar water heating systems. A large number of small

hydro power stations have also been completed. In line with the efforts being made at

national level for development of remote areas, BHEL has commissioned six stand

alone Solar Photovoltaic (SPV) power plants of 3x110 KWp and 3x55 KWp capacities in

Sunderbans (West Bengal). 57 Sets of Solar PV operated petrol pumps are being

supplied to M/s HPCL to illuminate and run the company-owned petrol pumps

smoothly irrespective of Grid power outage.

a) Oil and Gas

BHEL is supplying onshore drilling rig equipment viz. Draw works, Rotary-table,

Traveling block, Swivel, Mast and Sub structure, Mud systems and Rig electrics to

ONGC and Oil India Ltd. Well heads & X-Mas tree valves upto 10,000 psi rating for

onshore as well as offshore application are being supplied to ONGC, Oil bIndia Ltd.

and Private Drilling Companies.

BHEL has also supplied Casing Support System, Mudline Suspension System and

Block Valves to ONGC for offshore application. It also has the capability to supply

complete onshore Drilling rigs, Super-deep drilling rigs, Desert rigs, Mobile rigs, Work

over rigs and sub-sea well heads. Currently, BHEL is executing orders for

refurbishment and upgradation of onshore Oil Rigs from ONGC & Oil India Ltd. BHEL

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has supplied GT driven centrifugal compressorpackages to GAIL India Ltd. for their

gas compressor stations for the Dahej - Vijaipur gas pipeline project.

5. International Business

BHEL has, over the years, established its references in 70 countries across all

inhabited continents of the world. These references encompass almost the entire range

of BHEL products and services, covering Thermal, Hydro and Gas-based turnkey

power projects, Substation projects, Rehabilitation projects, besides a wide variety of

products like Transformers, Compressors, Valves, Oil field equipment, Electrostatic

Precipitators, Photovoltaic equipment, Insulators, Heat Exchangers, Switchgears,

Castings and Forgings etc. Some of the major successes achieved by BHEL have been

in Gas-based power projects in Oman, Libya, Malaysia, Saudi Arabia, Iraq,

Bangladesh, Sri Lanka, China, Kazakhstan; Thermal power projects in Cyprus, Malta,

Libya, Egypt, Indonesia, Thailand, Malaysia,\ Sudan; Hydro power plants in New

Zealand, Malaysia, Azerbaijan, Bhutan, Nepal, Taiwan, Tajikistan, Thailand,

Afghanistan; and Substation projects & equipment in various countries. Execution of

these overseas projects has also provided BHEL the experience of working with world

renowned consulting organizations and inspection agencies.

The company has been successful in meeting then demanding requirements of

international markets in terms of complexity of work as well as technology, quality and

other requirements viz. HSE requirements, financing packages and associated O&M

services, to name a few.BHEL has proved its capability to undertake projects on fast-

track basis.

The company has also established its versatility to successfully meet the varying needs

of different sectors, be it captive power, utility power generation or the oil sector.

Besidesundertaking turnkey projects on its own, BHEL also possesses the requisite

flexibility to interface and complement other international companies for large

nprojects, and has also exhibited adaptability by manufacturing and supplying

intermediate products.The company is taking a number of strategic business

initiatives to fuel further growth in overseas business. This includes firmly

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establishing itself in target export markets, positioning of BHEL as a regular EPC

contractor in the global market both in utility and IPPm segments and exploring

various opportunities for setting up overseas joint ventures etc.

Financial Results

12 Months Ended Profit & Loss Account (Standalone)

Value(Rs.in million) FY10A FY11A FY12E FY13E

12m 12m 12m 12m

Description

Net Sales 335728.10 424955.10 489719.02 548485.30

Other Income 8238.60 6418.10 8781.92 10099.21

Total Income 343966.70 431373.20 498500.94 558584.51

Expenditure -273145.10 -335328.00 -396550.04 -443176.12

Operating Profit 70821.60 96045.20 101950.90 115408.38

Interest -335.00 -547.30 -496.15 -535.84

Gross Profit 70486.60 95497.90 101454.75 114872.54

Depreciation -4580.10 -5441.20 -7282.77 -8739.33

Profit before Tax 65906.50 90056.70 94171.97 106133.22

Tax -22800.10 -29944.70 -29991.80 -33538.10

Profit after Tax 43106.40 60112.00 64180.18 72595.12

Equity Capital 4895.20 4895.20 4895.20 4895.20

Reserves 154278.40 196643.20 260823.38 333418.50

Face Value(Rs.) 10.00 10.00 2.00 2.00

Total No. of Shares 489.52 489.52 2447.60 2447.60

EPS 88.06 122.80 26.22 29.66

*A=Actual, *E=Estimated *Due to Stock Split Face Value Change from Rs.10/- to Rs.2.00

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Jun-11 30-Sep-11 31-Dec-11 30-Mar-12

3m(A) 3m(A) 3m(A) 3m(E)

Description

Net Sales 72714.60 105455.10 107430.80 204118.52

Other Income 2486.50 2198.60 1960.20 2136.62

Total Income 75201.10 107653.70 109391.00 206255.14

Expenditure -61582.30 -85863.10 -86626.30 -162478.34

Operating Profit 13618.80 21790.60 22764.70 43776.80

Interest -88.00 -96.40 -145.00 -166.75

Gross Profit 13530.80 21694.20 22619.70 43610.05

Depreciation -1709.10 -1888.10 -1861.40 -1824.17

Profit before Tax 11821.70 19806.10 20758.30 41785.87

Tax -3666.60 -5685.80 -6432.20 -14207.20

Profit after Tax 8155.10 14120.30 14326.10 27578.68

Equity Capital 4895.20 4895.20 4895.20 4895.20

Face Value(Rs.) 10.00 10.00 2.00 2.00

Total No. of Shares 489.52 489.52 2447.6 2447.6

EPS 16.66 28.85 5.85 11.27

*A=Actual, *E=Estimated *Due to Stock Split Face Value Change from Rs.10/- to Rs.2.00

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Key Ratio

Particulars FY10 FY11 FY12E FY13E

EPS (Rs.) 88.06 122.8 26.22 29.66

EBITDA Margin (%) 21.09% 22.60% 20.82% 21.04%

PAT Margin (%) 12.84% 14.15% 13.11% 13.24%

P/E Ratio (x) 24.97 2.12 9.92 8.77

ROE (%) 27.08% 29.83% 24.15% 21.46%

ROCE (%) 41.28% 44.59% 35.40% 31.36%

EV/EBITDA (x) 15.20 1.33 6.24 5.51

Debt-Equity Ratio 0.01 0.01 0.01 0.005

Book Value (Rs.) 325.16 411.71 108.56 138.22

P/BV 6.76 0.63 2.39 1.88

Charts:

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Outlook and Conclusion

At the current market price of Rs.288.00, the stock is trading at 9.92 x FY12E and 8.77 x FY13E respectively.

Price to Book Value of the stock is expected to be at 2.39 x and 1.88 x respectively for FY12E and FY13E.

Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.26.22 and Rs.29.66 respectively.

Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 19% over 2010 to 2013E respectively.

Bharat Heavy Electricals Limited (BHEL) has made its maiden entry in the Ukrainian market with an order for a Steam Turbine Generator (STG) package. Valued at nearly Rs.400 Million.

During the quarter, the company has reported Net Profit increased to Rs.14326.10 million from Rs.14032.30 million in previous year same quarter.

On the basis of EV/EBITDA, the stock trades at 6.24 x for FY12E and 5.51 x for FY13E.

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We expect that the company will keep its growth story in the coming quarters also. We recommend ‘BUY’ in this particular scrip with a target price of Rs.330.00 for Medium to Long term investment.

Industry Overview

Electrical equipment industry:

Recovery in India’s manufacturing sector is in full swing. While revival of automation

projects — typically one of the first indicators for any growth in the economy — is

already under way, an 11.3% rise in the electrical equipment industry has

underscored the overall growth story in the world’s second fastest growing economy.

The Rs 52,000-crore industry, which sells cables, switchgears, transformers and other

large electrical products, saw a major part of its growth come in the second half of

2009-10, after liquidity improved and companies resumed expansion plans.

According to the Indian Electrical and Electronics Manufacturers Association (IEEMA),

an apex body representing the Indian electrical equipment industry, the sector grew

about 20% in the second quarter, compared with 1.7% in the first half. “This demand

growth could likely see a two-fold increase in the next 2-3 years.Adding that this was

due to a pick-up in housing and construction.

Some of the companies in this sector are Siemens, L&T, ABB, Crompton Greaves,

Schneider Electric and WS Industries. Coming after a lull of two years, the growth in

electricals will strengthen policy measures as the government is working to restrict

Chinese power equipment makers. “Since spends on automation and electricals in any

project are equal, it was expected that growth in automation would also give a boost to

the electricals sector.Also as prices of electrical equipment are typically stable unlike

that of the automation sector, higher electricals sales implies that projects have been

revived.

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The industry has posted a 30% growth in the fourth quarter in sales of rotating

machines, switchgear and cables as a recovery in real estate and infrastructure

pushed up the demand for such products. The growth in demand mainly came from

industries such as power, textile, steel and cement. Analysts and industry experts said

the growth will be sustained as most of the transmission and distribution projects are

likely to begin in the next fiscal year, mainly by the Power Grid Corporation.

Demand for power equipment is expected to rise as India is targeting at least 9% GDP

growth for the year ahead.India has historically faced a demand-supply gap and this

will feed the electricals industry.

However, most of the orders would be through EPC route with more new players

entering the business and sub-contracting the same to existing contractors. It is

expected that competition would be intense. The government plans to add about

12,000 mw of capacity by the end of this fiscal, including from renewable sources. The

Central Electricity Authority has set a target to add more than 21,000 mw capacity by

the end of 2012.

The government has also taken policy initiatives to speed up power sector

development, such as the Rajiv Gandhi Gramin Vidyutikaran Yojana. “The power

sector reforms if implemented as scheduled will create large business for power sector

equipment manufacturers and service providers.

______________ ____ _________________________ Disclaimer:

This document prepared by our research analysts does not constitute an offer or solicitation

for the purchase or sale of any financial instrument or as an official confirmation of any

transaction. The information contained herein is from publicly available data or other

sources believed to be reliable but do not represent that it is accurate or complete and it

should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it’s

affiliates shall not be in any way responsible for any loss or damage that may arise to any

person from any inadvertent error in the information contained in this report. This document

is provide for assistance only and is not intended to be and must not alone be taken as the

basis for an investment decision.

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