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Global Equity Research - India

Sector: Capital Goods

Vikram Suryavanshi
vikrams@karvy.com

Bharat Heavy Electricals (Rs2,495)

Market performer Target Price: Rs2,653

Bharat Heavy Electricals (BHEL) is expected to report revenue increase of 27% YoY (QoQ increase of 19.7%) to Rs 67.86 bn on back of capacity addition and strong order book of Rs 1,240 bn.

Result Preview Q2FY10

The operating margins are expected to increase from 13.3% in Q2FY09 to 20.8% in Q2FY10 mainly due to 223 bps decline to 14.4% in staff cost as percentage of sales. The operating profit is expected to increase by 98.5% YoY to Rs 14.1 bn. The depreciation cost is expected to increase by 42.2% YoY to Rs 1.05 bn. The company has almost zero debt on its balance sheet and interest cost is expected to remain negligible. Other income mainly from surplus cash ~ Rs 100 bn is expected to remain stable on QoQ basis at Rs 2.31 bn. Overall, we expect net profit to increase by 61.7% YoY to Rs 9.95 bn, translating into EPS of 20.34 during the quarter. At the current price of Rs2,495, the stock is trading at 29x FY10E and 21.7x FY11E earnings and EV/EBIDTA it is trading at 18.1xFY10E and 13xFY11E. We have used average of P/E and DCF method to value BHEL. We have valued the BHEL at 25xFY11E earnings translating into PEG of 0.8. Our P/E based valuation per share of Rs 2,763 and DCF value per share of Rs 2,543 gives the target price of Rs 2,653 per share. We are revising our rating from Outperformer to Market performer considering 13% increase in stock price since last update on 3 September 2009.
Rs Million Revenues Op expenses Operating profit Operating margin (%) Other income Interest Depreciation Pre-Tax profit Tax provision Tax rate (%) Adjusted net profit Extraordinary Income Reported net profit Q2FY2009 53,426 46,319 7,107 13.3 3,072 22 743.6 9,414 3,256 34.6 6,158 0 6,158 Q1FY2010 56,714 50,795 5,920 10.4 2,271 42.8 961 7,187 2,654 36.9 4,533 173.3 4,706 Q2FY2010E 67,862 53,752 14,110 20.8 2,316 46.2 1,057 15,323 5,363 35.0 9,960 9,960 YoY Growth 27 16 98.5 56.3 (24.6) 110.1 42.2 62.8 64.7 1.2 61.7 NA 61.7 QoQ Growth 19.7 5.8 138.4 99.2 2 8 10 113.2 102.1 -5.2 119.7 NA 111.6

Bharat Heavy Electricals Reuters/Bloomberg Code Market Cap (Rs bn) Market Cap (US$ bn) Shares Outstanding (mn) 52-week High/Low (Rs) Major Shareholders (%) Promoters FIIs Banks/MFs Others Public
Source: Company & KSBL Research.

Y/E March (Rs Mn) BHEL.BO/ BHEL.IN 1,221 25.4 489.5 2,549 / 984 Revenues Op Profit Net Profit EPS (Rs) EPS Growth (%) Operating Margin (%) PER (x) 67.7 17 9.2 0.3 5.8 EV/EBITDA (x) Price/Sales (x) Dividend yield (%) RoCE (%) ROE (%)

FY2008 197,269 37,414 28,603 58.4 18.48 19 42.7 30.4 6.2 0.6 31.7 26.5

FY2009 268,586 44,259 31,382 64.1 9.72 16.5 38.9 25.3 4.5 0.7 31.4 24.3

FY2010E 322,304 61,649 42,055 85.9 34.01 19.1 29 18.1 3.8 0.9 35.4 26.6

FY2011E 406,103 84,729 56,361 115.1 34.02 20.9 21.7 13 3 1.2 39.2 28.6

FY2012E 491,384 104,419 68,994 140.9 22.41 21.2 17.7 10.3 2.5 1.6 39.3 28.4

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