Bharat Heavy Electricals Limited - Meeting with CMD - Antique

We recently met BHEL's CMD, Mr.B.P.Rao, who sounded cautious on the near-term ordering scenario due to uncertain environment in the Indian power sector. However, he maintained that the company has created manufacturing base of global standards with significant progress in indigenisation of new technologies, which will put the company at a significant advantage over peers whenever cycle turns up. Following are key highlights of the meeting:

Competitive landscape turning better, but pricing remains under pressure due to fewer orders

Sharp fall in power equipment demand in past two years has made sure that a meaningful part of new capacity planned by new players will not see the light of day. This will make competitive landscape favourable to larger players like BHEL in years to come. However, the demand environment remains uncertain. While there are many projects under bidding process (8-10GW), how many of these will be finally be ordered out in FY14 is a big question. Due to few projects, there is pressure on pricing. Execution of a few private sector power projects is also an issue.

BHEL has created scale and technology base, which is difficult to replicate

Over past 3-4 years, BHEL has scaled up its capacity to 20GW per annum and fully absorbed super-critical technology. The company has also created a leadership, which is capable of taking on competition head on. A big concern in the past, that BHEL will lose its key people to competition who were setting up manufacturing in India, has also proved to be false as BHEL has been able to retain its top talent at various levels in past 4-5 years. This augurs well for the growth of the company in future.

EPC capabilities fully developed

While BHEL's manufacturing capabilities were always par excellence; its EPC (project management) capabilities were often questioned a few years ago. The company hasbeen able to develop EPC capabilities in recent years, and is targeting EPC contacts more than just BTG (boiler - Turbine Generator) orders. This has further put BHEL ahead of new competitors, many of whom have limited manufacturing capabilities only.

Power equipment demand will rebound in 1-2 years

Given slow progress in new project awards in recent years, India's power shortage will remain high. Also, India is expected to see sharp rise in residential demand in next 10-12 years, like USA and Europe, due to rising urbanisation and improving lifestyles. This will ensure that India will continue to have large latent demand for power. While fuel issues have derailed the power sector for the time being, it will rebound with several steps being taken by Governments.

Valuations and View

We believe that BHEL continues to be the best power equipment company in India with superior execution capabilities, impeccable track record and healthy profitability. The company stands to benefit the most as and when power equipment market revives. In the near term, performance will get impacted due to declining order-books and hence earnings. Stock has corrected meaningfully in past few months and currently trades at 1.2 x FY14 P/BV. We believe that valuations are at a discount to its intrinsic worth, but lack triggers for rerating. Maintain Hold.

Source : Equity Bulls

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