BHARAT HEAVY ELECTRICALS LIMITED A STOCK VALUATION

PRESENTED BY ARKAYAN BAGCHI ANIRBAN CHAKRABORTY TEAM INDIGENIUS IIM-INDORE

COMPANY

‡ Largest supplier of power equipment in India ‡ Caters to core sectors of the Indian Economy viz., Power

Generation & Transmission, Industry, Transportation, Renewable Energy, etc.
‡ Wide product portfolio consisting of boilers, gas turbines,

fabric filters, steam generators and switch gears, among others.

POWER INDUSTRY - INDIA

‡ Fifth largest in generation capacity around the world
‡ Government reforms such as The Electricity Act and National Tariff Policy

will give the impetus to the Indian power sector. ‡ Challenges hindering the entry of new players

- Huge initial investments - Issues while acquiring land - Unavailability of skilled work force - Huge losses while transmitting and distributing power

BHEL STOCK 
Current Market Price: Rs. 2416.45

(as on 11th Nov,2010)

Shareholding Pattern (%) Promoters 67.7, MF/Banks 15.7, FII,NRI,OCBs 14.8, Indian public 1.8

RECENT PERFORMANCE HIGHLIGHTS

ORDER BOOK

FINANCIAL STATEMENTS

Balance Sheet for last 5 years Income Statement for last 5 years Cash Flow Statement for last 5 years

ANALYSIS OF FINANCIAL STATEMENTS

COMPETITION

STOCK VALUATION : KEY INPUTS 

A publicly traded firm potentially has an infinite life. The value is therefore the present value of cash flows forever. 

Since we cannot estimate cash flows forever, we estimate cash flows for a growth period and then estimate a terminal value, to capture the value at the end of the period.

STOCK VALUATION METHODS
1. EARNINGS GROWTH MODEL
PRICE TO EARNINGS RATIO

As per previous year trends, EPS = Rs. 109.50(Expected in 2011), P/E = 23(Expected in 2011), Intrinsic value of single share = 109.5 * 23 = Rs. 2518.5 With P/E ratio close to industry average of 26, the stock looks a decent

BUY.

PRICE TO BOOK VALUE RATIO

As per previous year and industry trends, Book Value = Rs. 400 (Expected in 2011), P/B = 6.5 (Expected in 2011), Intrinsic value of single share = 400 * 6.5 = Rs. 2600 Amongst its peers BHEL is having lowest P/B ratio meaning the stock is little undervalued, stock looks a good BUY

.

PRICE TO SALES RATIO

For BHEL the net sales are growing at an average of 15%-20% since last few years. So for the year FY2011 we can safely assume the sales will be around Rs. 40,000Cr. Sales per share = Rs. 805 (Expected), P/S = 3.2 (Expected) Intrinsic value of share would be = 805 * 3.2 = 2576 This Price to Sales ratio indicates that the stock is undervalued at this moment. So it can be a

good BUY at this market price.

PRICE TO CASH FLOW RATIO

As per previous year trends, We are predicting an increment in cash flow of 25% for the year FY2011. Cash Flow per share = Rs. 140 (Expected) P/CF ratio = 17.5 (Expected) Intrinsic value of share would be = 140 * 17.5 = Rs. 2520 This ratio gives a measure of firm s financial health. The ratio for BHEL is improving YoY. So the stock looks a decent BUY from medium to long term point of view.

2. DIVIDEND DISCOUNT MODEL 

 

Dividend Growth Model for a constant growth stock gives the estimation of the present value of the stock price. P0 = Dividend / (r-g); r = Expected return on stock, g = Expected growth rate in dividends For this stock the dividend return is more than 50% in FY2010 YoY. If the company's dividend growth rate exceeds the expected return rate, we cannot calculate a value because you get a negative denominator in the formula. Stocks don't have a negative value. In this case we are unable to predict by DDM model.

3. DISCOUNTED CASH FLOW
With a very high revenue visibility and long term stability provided by immense power sector opportunity in the country, we believe that Discounted Cash Flow methodology is apt for valuing BHEL.

Using sensitivity analysis we find that for a terminal growth of 5%, we can expect the intrinsic value of the stock to be in the range of Rs 2400 - Rs. 3200 for a WACC rate of 15% to 11%.

INVESTMENT ARGUMENTS 
Strong 2QFY2011 results
Robust revenue growth of 26.2% yoy to Rs. 8,491cr for 2QFY2011 Net sales rose by 430bp yoy to 64.3%. Employee costs were down by 90bp to 15.2% of sales Order inflows for the quarter surged by 68.3% yoy to Rs.13,500. 

Power segment driving growth
Strong revenue growth of 28.3% yoy to Rs. 6,965cr for 2QFY2011 Maintain a balanced order backlog Strategy of revenue portfolio spread across the power and industry division in the ratio of 70:30 

Dominant player in the domestic power equipment market
Largest supplier of power equipment in India Wide product portfolio consisting of boilers, gas turbines, fabric filters,etc Only Indian player manufacturing large-size, gas-based power plant equipment Strong presence in the boiler turbine generator (BTG) category, which forms a key part of the power plant. 

Order inflow improves
Order inflows during 2QFY2011 increased by 68.3% yoy to Rs. 13,500cr BHEL received orders from its JVs with various SEBs for the supply of supercritical BTG. NTPC-BHEL Power Projects Ltd (NBPPL) has committed Rs 200 crore by end of March 31, 2011 Front runner to receive a significant share of a bulk tendering order for 11 660MW sets, worth Rs 250 billion for complete turnkey in FY11. 

Strategic tie-ups to enhance competitive edge

INVESTMENT APPREHENSIONS 

Increased competition
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Power equipment industry is undergoing structural changes post the increasing preference for fuel-efficient and supercritical technologies. Indian companies have set up or have initiated the process of setting up local manufacturing facilities in collaboration with leading international players. 

Execution concerns
Long delivery schedules of BHEL.
Chinese manufacturers on account of their large capacities and standardized product offerings pose threat. Under the XIth plan ~49% of total orders have been delayed

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FUTURE OUTLOOK OF STOCK 
Medium term
Very strong with continued inflow of orders, streamlining of new capacities that will aid volume growth, continued capacity addition in power sector and expansion of transmission network. Stock is trading much below its 52week high Recommend BUY/HOLD 

Long term
Competition from companies such as L&T, JSW Energy which will start their power equipment manufacturing operations. Not expected to increase its current market share in the long term. Recommend a NEUTRAL outlook.

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THANK YOU!!!

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