Bharat Heavy Electricals

FY2009 Flash Result Update

REDUCE Performance Highlights

Price Rs1,532 ƒ Strong Top-line growth: Bharat Heavy Electricals (BHEL) has announced
its flash provisional results for FY2009. The company posted strong
Target Price Rs1,303 Top-line growth of 28.5% yoy to Rs27,505cr (Rs21,401cr) for FY2009, which
was in line with our expectations. The company witnessed strong execution
Investment Period 12 months
during 4QFY2009, with Gross Sales growing 32.5% yoy to Rs10,550cr
(Rs7,960cr).
Stock Info

Sector
Capital Goods ƒ Staff provisioning eats into Margins: On the Operating front, the
company’s performance was hit hard by the wage provisioning cost for the
Market Cap (Rs cr) 74,990 Sixth Pay Commission and Gratuity payments. Pertinently, the company has
been providing for Employee costs since the past several quarters to
Beta 1.0 account for the wage revision as per the Sixth Pay Commission guidelines.
The company had estimated total provisioning of Rs1,313cr for the wage
52 WK High / Low 1934/984
revision for FY2009. Since the company had already provided Rs839cr in
Avg. Daily Volume 451668 the first three quarters of FY2009, the balance Rs474cr was expected to be
provided in 4QFY2009. However, with Gratuity provisioning increasing to
Face Value (Rs) 10 over Rs600cr, the company finally ended up providing Rs1,728cr for
Employee costs for the full year. Nevertheless, with the provisioning coming
BSE Sensex 10,535 to end in FY2009, the company could see positive impact on its Margins
FY2010 onwards.
Nifty 3,256

BSE Code 500103

ƒ Disappointing Bottom-line growth: Owing to the fall in the Margins, Profit
before Tax (PBT) for FY2009 grew a meagre 2.3% yoy to Rs4,530cr
NSE Code BHEL (Rs4,430cr). However, with the effective Tax rate reducing from 35.5% last
year to 32.9% in FY2009, Net Profit grew 6.3% to Rs3,039cr (Rs2,859cr).
Reuters Code BHEL.BO For 4QFY2009, Net Profit grew 12.4% yoy to Rs1,248cr (Rs1,111cr).
Bloomberg Code BHEL@IN
Key Financials
Shareholding Pattern (%)
Y/E March ( Rs cr) FY2007 FY2008 FY2009E FY2010E
Promoters 67.7 Net Sales 17,238 19,305 25,025 30,420

MF/Banks/Indian FIs 13.8

% chg 28.9 12.0 29.6 21.6
Adj Net Profit 2,414 2,860 3,039 3,986
FII/ NRIs/ OCBs 16.2
% chg 44.1 18.5 6.2 31.2
Indian Public/others 2.3
Operating EBITDA (%) 18.6 17.0 14.3 16.9
EPS (Rs) 49.3 58.4 62.1 81.4
Abs. 3m 1yr 3yr P/E (x) 31.1 26.2 24.7 18.8
P/BV (x) 8.5 7.0 5.8 4.8
Sensex (%) 1.9 (31.3) (10.3)
RoE (%) 30.0 29.2 25.7 27.9
BHEL (%) 4.2 (6.3) 30.3
RoCE (%) 30.9 32.6 28.7 30.1
EV/Sales (x) 4.0 3.5 2.6 2.1
Puneet Bambha
EV/EBITDA (x) 19.4 18.0 16.4 11.5
Tel: 022 – 4040 3800 Ext: 347 Source: Company, Angel Research
e-mail: puneet.bambha@angeltrade.com

April 6, 2009 1
 Bharat Heavy Electricals
Capital Goods

Strong Order Flows – The Key Positive

The biggest positive for BHEL during FY2009 was the continued strong growth in its
Order inflows. During FY2009, the company’s Order inflow grew 18.7% yoy to Rs59,687cr
(Rs50,270cr). In the Power Segment, the company secured orders worth Rs44,407cr for
17,020MW of power plants while the Industrial Segment and International business
witnessed Order inflows of Rs10,254cr and Rs3,265cr, respectively. Besides,
management also seems upbeat about Order inflows of the next year guiding around
Rs50,000cr of orders for FY2010. In FY2009, BHEL’s Order backlog continued to be on
upward trajectory increasing by a substantial 37.3% yoy to Rs117,000cr (Rs85,200cr).

Exhibit 1: Order Book Position

4.3
140,000 4.0 4.5
120,000 4.0
3.1 2.9 3.5
100,000
2.6 3.0
(Rs cr)

80,000 2.5
60,000 2.0
1.5
40,000
1.0
20,000 0.5
0 0.0
FY2005 FY2006 FY2007 FY2008 FY2009

Order Inflow (LHS) Order Backlog (LHS) Order Book / Sales (RHS)

Source: Company, Angel Research

Management guidance v/s MoU

In the post result conference call, management guided for 20-25% growth in its
Top-line and around 25-30% growth in its Bottom-line for FY2010. However, as per the
MoU signed by the company for FY2010, it has targeted to achieve Gross Sales of
Rs31,000cr implying a growth rate of only 12.7%. Even under the stretch target for the
‘Excellent’ rating, the company has targeted Gross Sales of Rs32,000cr at a growth rate
of 16.3% for FY2010. Though we believe the company has adopted a conservative
approach while signing the MoU, it still leaves a lot of gap to catch up with the 20-25%
Top-line growth.

Key takeaways from the concall

• Around 30% contracts of BHEL’s current Order book are on EPC basis while the
remaining 70% entail the BTG package. The company also prefers BTG contracts as
the EPC contracts involve higher outsourcing and hence comparatively lower
Margins.
• Management also guided that the wage provisioning was over and that it would not
continue in FY2010. The company expects a total wage bill of Rs4,500cr for FY2010.
The company also expects to incur capex of Rs1,250cr in FY2010.
• Management expects 95,000-100,000MW likely capacity addition during the Twelfth
Five-year Plan. Of this, around 70,000MW is expected to be in Thermal followed by
Hydro and Nuclear at around 20,000MW and 8,000MW, respectively.
• In FY2009, Inventory days continued to be at FY2008 levels of 99 days. Debtor days
were also almost at same levels of last year at 208-209 days.
• The company’s manufacturing capacity expansion from 10,000MW to 15,000MW pa.
continues to proceed apace and further augmentation to 20,000MW is planned by
2011-12.

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 Bharat Heavy Electricals
Capital Goods

Outlook and Valuation

With BHEL’s Order book swelling to historic highs, we believe going ahead Order
execution would emerge as a key challenge area for the company. Though the company
has managed the execution reasonably well in FY2009, nonetheless several projects
involving BHEL are already running behind schedule. In addition, the company also faces
a diverse set of challenges emanating both from the weak economic environment and
increasing competition in the Sector, which could limit further upside in the stock.

In wake of the new MoU signed and inputs gathered during the recent concall, we are
marginally pruning our EPS estimates for FY2010E by 5.6% to Rs81.4. At the current price
of Rs1,532, the stock is quoting at a P/E of 18.8x FY2010E EPS and EV/ EBITDA of 11.5x
FY2010E EBITDA, which we believe is expensive. We assign a Target PE multiple of 16x
FY2010E EPS for the company arriving at a Target Price of Rs1,303. Given the overall
concerns and expensive valuations, we downgrade our rating from Neutral to
Reduce on the stock.

April 6, 2009 3
 Bharat Heavy Electricals
Capital Goods

Exhibit 2: Key Orders during FY2009

Date Client Configuration Value (Rs cr) Nature of Work
28-Apr-08 Chhattisgarh State Electricity Board 3 * 500 MW 3,368 Main Plant Package
26-May-08 HMEL 1 * 153 MW 1,150 Captive Power Plant
9-Jun-08 Pragati Power Corporation Limited 3,588 Combined Cycle Power Plant
20-Jun-08 Damodar Valley Corporation 1 * 500 MW 1,840 Turnkey Contract
26-Jun-08 ONGC 506 Refurbishment of Rigs
30-Jun-08 PEEGT, Ministry of Electricity, Syria 2 * 200 MW 2,080 Turnkey Contract
11-Jul-08 Tamil Nadu Electricity Board TNEB 1 * 600 MW 2,175 EPC Contract
16-Jul-08 International Energy Resources (IER), UAE 2 * 42 MW 160 Gas Turbine Generating Units
25-Jul-08 MSPGCL 2 * 500 MW 2,690 BTG Package
04-Aug-08 Nam Chien Hydro Power Project 2 * 100 MW 200 Electro-mechanical equipment
05-Aug-08 APPDCL 2 * 800 MW 2,500 Supercritical Boilers
08-Aug-08 Nyaborongo Hydro Electric Power Project 2 * 14 MW 400 Turnkey Contract
26-Aug-08 International Energy Resources (IER), UAE 2 * 42 MW 140 Gas Turbine Generating Units
29-Aug-08 GVK Power Ltd 2 * 270 MW 1,155 Main Plant Package
09-Sep-08 ONGC Tripura Power Co. Pvt. Ltd (OTPC) 2 * 363.3 MW 2,200 Combined Cycle Gas Turbine
25-Sep-08 Steel Authority of India Limited (SAIL) 338 Three Turbo-blower Packages
30-Sep-08 RRVUNL 2 * 250 MW 990 Main Plant Package
21-Oct-08 Satluj Jal Vidyut Nigam Limited 6 * 68.67 MW 641 Electro-mechanical Package
23-Oct-08 NTPC 2 * 660 MW 1,474 Steam Turbine Generators
18-Nov-08 APGenco 1 * 600 MW 1,325 Main Plant Package
24-Nov-08 Coastal Gujarat Power Limited 240 Power Transformers & Busducts
4-Dec-08 Oman 2,000 Gas Turbine Generator Package
22-Dec-08 Bina Power Supply Company Limited 2 * 250 MW 1,175 Main Plant Package
24-Dec-08 NTPC 2 * 500 MW 2,100 Main Plant Package
26-Dec-08 Jindal Power 4 * 600 MW 5,040 Main Plant Package
09-Feb-09 NTPC, NTPL and Mahagenco 7,000 Main Plant Package
23-Feb-09 Madhya Pradesh Power Generating Company 2 * 600 MW 3,150 Main Plant Package
9-Mar-09 Powergen Infrastructure 81 Generator Transformers
27-Mar-09 NPCIL 345 Steam Generators
Source: Company, Angel Research

April 6, 2009 4
 Bharat Heavy Electricals
Capital Goods

TM

Angel Broking Limited

Research Team Tel: 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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