ValuePickr Forum

Bhel

bhel

we all know about the business aspects of bhel so no need discussing those. one of the important aspects of picking up stalwarts for portfolio building is when there are perceived fears surrounding a stock or sector and i believe bhel suffers from such fears currently.

bhel has many attributes of good investment worthiness:

1). market leader

2). debt free

3). high roe with good cash generation

4). good dividend payout

some negatives perceived by markets are

1). poor sectoral prospects

2 order book concerns

3). govt ownership

coming to some financial relevant details:

cmp 222 market cap 54165 crores

book value 112

share capital 489 crores with each share of rs 2.

outstanding shares 244.5 crore shares of rs 2 each.

as on sep 12 statement of accounts:

long term borrowings at 128 crores, short term borrowings at 1668 crores

cash and equivalents at 5307 crores, non current investments 461 crores, current investments 100 crores.

outstanding order book as on q2 fy 13 is 122300 crores

revenues for fy 12 was 49509 crores and net profits was 7039 crores.

for hy fy 13, revenues at 19750 crores (against 18188 cr for h1 fy 12) and net profit at 2195 cr ( vs 2227 for h1 fy 12)

company has been generating roe in excess of 25% since past five years.

the cash flows for bhel have been significantly higher than the capex it has done. i read in one research report that company generated operating cash flows of 25600 crores during fy 02 to fy 11 and did capex of only 6300 crores.

though bhel may not see the fast growth shown in past few years, it is likely to maintain moderate growth in next few years and since the cost of capital of bhel is significantly below return on capital, bhel seems attractive for someone wanting to invest for long term.

order book concerns and sectoral concerns are there but one needs to take a guess at how much is built into current prices. plus any initiative by the govt on disinvestment or such other process may provide surprising upsides.

div yield is 2.9% at cmp.

promoters hold 67.72% equity.

the current fall in prices has been due to lacklustre performance of the company since past few quarters and even more due to sluggish order inflow.

main concerns of market relating to bhel are about competition from chinese players, poor perception of the sector it operates in mainly power and coal sector and an overall lethargy to stocks from these sectors.

technically the stock has made multiple bottoms at around 195-196 and support at these levels seems to be strong.

for someone wanting to play the pick up in infra and energy and power sector bhel seems to provide a safe and lucrative option.

Hitesh bhai the concern here is not that much about the Chinese players but now they have to compete with 4 other local makers of equipment like L&T etc. So even if cycle turns around they would face competition this time resulting in deterioration of margins. Earlier they had a free run on especially NTPCs projects where the Chinese were not allowed to bid. Probably better play would be the beaten down utility names say KSK or Adani or Indiabulls etc where it is just a matter of time before the policy issues are resolved

1 Like

Hitesh bhai the concern here is not that much about the Chinese players but now they have to compete with 4 other local makers of equipment like L&T etc. So even if cycle turns around they would face competition this time resulting in deterioration of margins. Earlier they had a free run on especially NTPCs projects where the Chinese were not allowed to bid. Probably better play would be the beaten down utility names say KSK or Adani or Indiabulls etc where it is just a matter of time before the policy issues are resolved

Some Indian cos which had greedily gone for Chinese power equipment are now repenting heavily due to severe uneperformance because of quality issues. Some name which come to mind include CLP in Haryana,Reliance power yamunanager plant is virtually at standstill,JSW Rajasthan plant, Adani,Lanco etc. JP which is one of the better executioners in the country proudly says that not even a single Chinese bolt has gone in their power plant leave aside main equipments. So BHEL does stand a chance but problem is the sarkari culture amonst a large no of Bhel employees who are used to monopoly which is no longer existing.

Vivek the extraordinary margins which BHEL made during the last cycle would never fructify. Surely the local private companies like L&T have better technology and would learn and adapt soon. Chinese have anyway been priced out of the market because of 30% rupee depreciation viz yuan.

Order backlog has been declining driven by coal issues, funding constraints & competition. Some of the recent orders have been won at breakeven prices. As such, the current orderbook is a lower margin one as compared to the past virtual monopoly days. Revenue de-growth will precipitate margin decline as operating deleverage kicks in. By FY15/FY16, it may even report a loss. This is a value trap. Stay away.

I have a very small position in BHEL earlier this month. I think most of the concerns are priced in today. This is a “Stalwart” in a bad time (as per Peter Lynch).

Disclosure: I have a position in BHEL with intention of averaging in over the next year.

Some interesting facts apart from what Abhishek has nicely summarized. From a P/E range perspective, the trailing p/e that they are at - around 8, was last seen in 2001.

2001 vs 2012

in 2001, market had not opened up as much, private projects were relatively unheard of (not that there weren’t any, read about Spectrum power http://www.delhiscienceforum.net/power/288-andhras-ipp-policy-private-loot-of-public-finances-by-prabir-purkayastha-.html)

Over last few years, private players have been head over heels in setting up new projects. Temper this with the fact that many are having a tough time in execution.

In 2001, order book was around 1.2 times. Today its around 2.5 times. Today, Analysts are crying because it has slipped from 4 times to 2.5 times in the last couple of years.

In 2001, interest rates were sky high. Gilts were at 11%. Today they are between 8% and 9%

Recently the govt. has introduced duties designed to slow down Chinese power equipment imports. A plus for BHEL.

Read this report purely for the facts and nothing more.

http://emkayglobal.com/downloads/researchreports/BHEL%20Company%20Update_200912.pdf

Sorry, I meant to refer to Hitesh who has summarized the facts.

Mr. Vinayak, i learn, is a respected name on Infra sector and he made this tweet today morning.

**Vinayak Chatterjee**a@Infra_VinayakCh

BHEL informs PMO that it has reduced its capacity utilisation by 70% on a/c huge receivables,piling inventories and drying order-book.

Hi,

I am also interested in BEHL at current valuations. There was another interesting point raised by Raja Janakiraman in another thread - regarding disinvestment plan keeping the price subdued or even leading to further correction.

I just finished reading the latest Feb concall transcript available here

The views expressed there are quite positive. As per the CMD tough times have bottomed out and the management is already seeing revival. They might have good new order in the first half of FY14 itself.

Also saw an interview today which mentioned that Jyotiraditya Scindia and PC are a great combo and are expected to resolve the power sector issues.

The EGOM meetin which happened recently could not decide on BHEL divestment and minister Patel mentioned it might happen only next year. So the gov is also waiting for sentiments to improve and are already working towards reviving the power sector.

My contention is that by the time the disinvestment announcement comes BHEL would have already ran-up backed by good new orders and announcements of power sector reforms.

Read the concall transcript for details.

I feel BHEL is a good contra bet at current levels.

Cheers

Vinod

Current Market Cap of 51,550 Crores.

Sales for 9 months of FY13 stood at ~28,800 Crores. Estimating that the company clocks sale of only 8,000 crores (which is the most conservative estimate - a level never seen), the company can clock 36,800 Crores of turnover.

The company has been able to maintain its net profit margins at 12% (even in trailing 12 months).

Worst case scenario that the profit margins falls to 10%,

we have 3680 Crores of Profit translating to a PE of 14

Optimist Scenario Profit margins remain at 12%,

We clock 4,400 Crores of profit translating to a PE of 11.

so a PE of 11-14 for a stalwarth such as BHEL.

Bad most of us would say, but then it all depends on the margins and the order book in the coming quarters (these numbers can shift if the order book worsens or improves).

Personally , I think we could still have a 20% discount from the Current Market Price to start nibbling at the stock.

Guidance Sought.

market pays growth

Most Indian stocks (cyclicals included) went to crazy valuations in 2007 (BHEL peaked at 45x forward P/E) so the through-cycle average is really misleading. To illustriate, BHEL reached a low P/E of 13x in 2008 (through cycle average) which is what most analysts used as a trough. You have to go only a little back (2001-2) to have seen the stock trading at 5-6x P/E.

If you feed in 5x, BHEL has a 30% downside from current levels. Its trading at 8x now when global cyclicals (Siemens, GE, Alstom) are at 10-12x.

Technically, the stock broke below its 200DMA on Feb 1st 2013 which is a very bearish flag.

It can be devastating if you try to pick a bottom for cyclicals; the best way to build your position is cost averaging, keeping some firepower to buy when it breaks out of its 200DMA.

i see more down side

Why not to invest in NTPC rather than BHEL to benefit from turnaround in power sector.

BHEL has sales visibility for next 2-3 years from its current order book {order book around 122K crores and current revenue run rate of around 38K crores]. So itâs clear that for its revenue to post 10% CAGR, power sector fortunes need to turn around quickly [next 12 â 18 months]. BTG (boiler turbine & generators) for most projects planned for the 12th [2012-17} and early part of the 13th plan have already been awarded, while visibility for projects beyond that remains opaque. In case of NTPC profits and revenue can grow easily at 10 % CAGR for next 5 years if they can execute 80% of their conservative target addition by FY17.

As per my limited understanding [have not done any detailed analysis], overall revenues and profits might decline over next 2-3 years, as even if company registers quick turnaround in order book, the work on those orders may not start for next 2-3 years. So many things have to go right over next five years for BHEL to give decent return. 1) Over next five years earnings CAGR should be more 10% 2) profit margins should remain at current levels 3) BHEL should be able to maintain its existing market share. Now all the three are questionable [Not implying impossible, but there are lot of variables involved like new order inflows, competition from local players, commodities movement and most important competition from Chinese players over a period of next 5 years]. Moreover with lot of uncertainty in power sector, unless and until utility companies fortune turn, BHEL profits or revenue cannot improve. So to benefit from infra and Indiaâs long term story, IMHO better to bet on utility company than BHEL currently.

Now compare the same situation with NTPC. NTPC earns revenue on its existing projects, where revenue and profits increased in line with cost inflation. So its like profit is more or less guaranteed to stay at last year level and will increase to the extent of capacity addition, increase in PLF and increase in tariff in line with cost inflation. Despite capacity additions, total power generation for FY12 remained flat at 220bn units because of a) coal issues b) lower off take from SEBs and c) lower capacity addition due to land issues. Even under pessimistic scenario installed capacity is expected to increase by 40% (from current 37 GW to 54 GW by FY17 (NTPC target 66 GW). Regulated equity is only 40% of total shareholdersâ funds, despite this company is reporting ROE of 13-14%, which implies that its actual ROE is much higher than 15.5% (regulated ROE) because of its own efficiencies.

At the current price NTPC is like a bond with earnings yield of 8% on PE basis and yield of 10% on P/CF basis. Book value has grown at a CAGR of 8% since listing. So in the worst case scenario, over the next decade price should increase a rate of 8% CAGR provided one year forward P/B multiple of 1.5x is maintained. Current dividend yield of 2.5% with growth of 8% p.a even under worst case scenario.

Yes NTPC looks reasonably attractive too. It has more predictable revenues/PAT growth for sure over the next 5-7 yrs. But I think re-rating possibilities are much higher for BHEL once the mess in the power sector is cleared. What we need is reforms in our SEB’s and some independence & objectivity in how tarrifs are set by each state electricity commission. Some states have not increased electricity rates for 1 decade !

We were in a similar mess back in 2001-2002 when there was overcapacity in equipment co’s, impending bankruptcy of state distribution utilities & no reforms. When some initiatives were taken there was huge operating leverage & secular growth that played out in these co’s between 2003-2008. Competition of course is much higher now as you say with Korean & Chinese co’s and local private players in the fray. Will be interesting to see how things play out…

Disclosure: No positions currently in power sector

Hi Anil Bhai,

The only point I do not agree with is the opportunity size visibility mentioned as “opaque” in your post.

Please have a look at this document:

http://dhi.nic.in/dhi_draft_mission_plan_2012-22.pdf

At 3%+ dividend yield BHEL may not have too much downside.

My understanding is that it will be difficult for competition to match BHEL’s scale and quality and with central government leading the new cycle of adding capacity BHEL would stand a better chance.

Also have a look at this link about our new power minister. http://www.livemint.com/Industry/HgF7hMUl7BWheRxl8CuR4J/India-to-start-Kishanganga-hydropower-project-construction.html

I would like to trust this minister to deliver.

Do have a look at the latest concall transcript of BHEL too.

Cheers

Vinod

Vinod Bhai

For a moment lets assume that opportunity size visibility is not opaque. Now given the prevailing risk return ratios, between NTPC and BHEL which one will you prefer. Now if visibility is not opaque, and orders should start flowing in next 1-2 years, NTPC account for major part of India’s installed capacity it will be an equally beneficiary. Now consider the fact that orders are already placed for current plan [2012-17] take 2-3 years of delay in construction. Orders are already placed for early part of 13th plan [2017-22]. Now unless and until current plans start moving towards completion I do not think private sector will get fresh loans and as and when projects start moving NTPC is a direct beneficiary without any risk of competition unlike for BHEL. If you look on PE and dividend yield yes BHEL is cheaper but if you look at replacement cost and PBV NTPC is cheaper. NTPC is beneficiary of increased competition in between BHEL, local andChineseplayers. But yes, BHEL is a high BETA stock and NTPC is a low BETA stock. Both upside and downside are higher with BHEL.

Hi,

I think the report mentioned in my previous post has some critical data for analysing the power sector. It has mentioned points that are detrimental to BHEL’s prospects aswell some steps that the gov needs to take to help the domestic players.

Some excerpts from the report for which views are welcome:

1) “As stated earlier, two-thirds of the BTG requirement from the 12thPlan has already beenordered. If the present scenario continues, where close to 45% of the demand is catered toby foreign players, it would create significant overcapacity in the Indian industry in thecoming years. The move by the National Thermal Power Corporation (NTPC) in enforcingan offset mechanism (where the supplier of major equipment needs to set up localmanufacturing in Indian as qualifying criteria for the bid) is a welcome move to promote thedomestic equipment industry”

2) “Indian players, as well as global players focusing on the Indian market, have put in placefacilities to manufacture products based on supercritical technology. During the 11th Plan,the share of supercritical technology was 14%, while in the 12thPlan the share ofsupercritical technology will be more than 60%. More than 80 GW of supercritical sets havebeen awarded by India till date. Foreign players have been the recipients of the major share****of such orders”

Any Idea on the capacity of BHEL to cater to the supercritical segment?

  1. "Foreign companies have received huge bulk orders, primarily from Indian private players forpower plants to be commissioned during the 12thand 13thFive Year Plans. As a result, mostBTG equipment players in India do not have healthy order books. This scenario would lead****to intensified competition for upcoming tenders"

The BHEL concall mentioned a reversal of cycle from Pvt to Central gov lead projects though the report allocates a substantial contribution from Pvt sector.

  1. “A large share of Indiaâs current installed thermal capacity is more than 20 years old.Advanced ultra-supercritical boilers are being developed in the country. Retrofitting andrefurbishing of old existing plants would become a major source of demand in the comingyears”

This can be another area of opportunity for revenue for Indian players

The report goes on to mention various steps required to revive the industry like higher import duties to make it a level playing field for Indian manufacturers and also bring down the current deficit in import-export of powerequipment.

There is also mention of need tostandardize the equipments used in various plants to enable shifting between sites in case of delays in commissioning, Price Escalation Clause to be included in the contract, impose conditions on foreign players to ensure spare parts supply is not affected etc, fasterclearancesfor projects etc.

If therecommendations are implemented it would be great for BHEL and NTPC.

Cheers

Vinod