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com March 14, 2008

Index Take Five

Scrip Reco Date Reco Price CMP Target
w Grasim 30-Aug-04 1,119 2,858 3,853
w Stock Update >> Bharat Heavy Electricals
w ITC 12-Aug-04 69 192 247

w Sector Update >> Banking

w L&T 18-Feb-08 3,536 2,908 4,428
w Maruti 23-Dec-03 360 835 1,230
w Ranbaxy 24-Dec-03 533 464 558

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investor’s eye stock update

Bharat Heavy Electricals Apple Green

Stock Update

Conquering new frontiers Buy; CMP: Rs1,878

Company details Key points

Price target: Rs2,845

w According to media reports Bharat Heavy Electricals Ltd (BHEL) has been awarded
the order to supply boiler package for National Thermal Power Corporation (NTPC)'s
Market cap: Rs91,932 cr
1,320-megawatt (MW) Barh stage-II supercritical power project in Bihar. The
52 week high/low: Rs2,930/969 value of the order has not been disclosed. The breakthrough in the supercritical
NSE volume: 9.4 lakh space would help address the concerns over the company's capability to secure
(No of shares) supercritical orders and beat competition.
BSE code: 500103 w BHEL has a healthy order book. It has already won orders worth Rs10,583 crore or
NSE code: BHEL 3,345MW in Q4FY2008 so far. We expect the order inflow to remain buoyant
Sharekhan code: BHEL especially for the projects based on the supercritical technology.

Free float: 15.8 cr w The company has brought on stream an additional manufacturing capacity of
(No of shares) 4,000MW during the current quarter, taking its total installed capacity to
10,000MW. The timely expansion of its manufacturing capacity augurs well for
Shareholding pattern
the company considering the favourable demand outlook across the globe.

w The robust order inflow and timely capacity expansion provide visibility to the
Institutions Others company's future earnings. We continue to remain positive on the stock and
5%
8% reiterate our Buy recommendation on it with a price target of Rs2,845.
Foreign w We believe the recent correction in the stock and the concerns over the company's
20%
ability to secure supercritical orders are overdone. The stock's current valuations
Promoters are extremely attractive. At the current market price it trades at 22.4x FY2009E
67% and 16.5x FY2010E earnings. In terms of enterprise value (EV)/earnings before
interest, depreciation, tax and amortisation (EBIDTA), the stock trades at 15.5x
and 11.1x its estimates for FY2009 and FY2010 respectively.
Price chart
Supercritical technology—powering ahead
Even though concerns remain over BHEL's ability to bag orders based on the
3050
2800
supercritical technology, there are reports that NTPC has awarded the 1,320MW
2550
2300 (2x660) Barh stage-II supercritical power project in Bihar to BHEL. The value of the
2050
1800
1550 Key financials
1300
1050 Particulars FY06 FY07 FY08E FY09E FY10E
800
Mar-07

Mar-08
Jun-07

Net profit (Rs cr) 1679.3 2414.7 3158.4 4105.2 5572.7

Sep-07

Dec-07

% y-o-y growth 75.8 43.8 30.8 30.0 35.7

Shares in issue (cr) 49.0 49.0 49.0 49.0 49.0
Price performance EPS (Rs) 34.3 49.3 64.5 83.9 113.8
% y-o-y growth 75.8 43.8 30.8 30.0 35.7
(%) 1m 3m 6m 12m PER (x) 54.7 38.1 29.1 22.4 16.5
Book value (Rs) 149.2 179.5 232.9 299.2 389.1
Absolute -5.0 -27.0 -1.0 79.3 P/BV (Rs) 12.6 10.5 8.1 6.3 4.8

Relative 4.8 -4.6 0.5 49.8 EV/EBIDTA (x) 35.5 26.2 20.6 15.5 11.1
to Sensex RoCE (%) 36.4 45.2 48.0 48.5 50.9
RoNW (%) 23.0 27.5 27.7 28.0 29.3

Investor’s Eye 2 March 14, 2008 Home Next

investor’s eye stock update

order has not been disclosed, however we expect it to be government's initiative of "Power for all by 2012". This,
in the range of Rs5,000 crore. NTPC has earmarked Rs7,341 we believe, augurs well for the company. We expect BHEL's
crore for the project. Earlier, BHEL had emerged as the order inflow to remain strong in the coming months. The
sole bidder for the project. Apart from securing the NTPC company has already announced orders to the tune of
project, BHEL has also signed a memorandum of Rs10,583 crore or 3,345MW in Q4FY2008 so far. What also
understanding with TNEB for a joint venture to set up a stands out in the recent orders is that BHEL is capable of
2x800MW supercritical power project in Tamil Nadu. The bagging advanced gas-based technology orders as well. This
project is valued at Rs8,500 crore and BHEL would have a displays the company's ability to absorb and prepare itself
26% stake in the joint venture. The equity stake in the for the changing technology.
joint venture would establish BHEL as a supplier for the
supercritical technology for the project. We believe the Ramping up capacity for faster execution
concerns would get allayed further as the company obtains True, the order inflow continues to be strong for the
more orders through various other sources. The company's company but the execution of these orders remains the
pipeline for the supercritical technology-based power key to its success. The company is leaving no stone unturned
projects continues to remain strong. to achieve success. For instance, to expedite the execution
of its projects and capitalise on the rising demand, it has
Proposed projects on super critical technology expanded its capacity to 10,000MW. The additional capacity
To be Location Capacity came on stream in January 2008. The company is also
implemented by (MW) adding another 5,000MW of capacity, which is likely to come
North on stream by December 2009. This will take its total
Meja UPRVUNL-NTPC JV Uttar Pradesh 2 x 660 capacity to 15,000MW per annum. Not only that BHEL is
East also looking to double it transformer capacity to
Akaltara UMPP SPV Chattisgarh 4,000 38,500MVA.
Darlipalli NTPC Orissa 4 x 800
North Karanpura NTPC Jharkhand 3 x 660 Outlook: Strong visibility in the earnings
Sundergarh UMPP SPV Orissa 4,000 BHEL has displayed robust growth over the years. We
Tilaiya UMPP SPV Jharkhand 4,000
estimate its revenues and profits would grow at a
South compounded annual growth rate (CAGR) of 29.2% and 32.2%
Cheyyur UMPP SPV Tamil Nadu 4,000 respectively over FY2007-10. The order inflow remains
Krishnapatnam AP Genco Andhra Pradesh 2 x 800
strong whereas the upcoming capacity would help BHEL to
Krishnapatnam Reliance Power Andhra Pradesh 4,000
UMPP expedite the execution of its orders. The breakthrough in
Tadri UMPP SPV Karnataka 4,000 the supercritical technology based projects would allay the
Udangudi TNEB-BHEL JV Tamil Nadu 2 x 800 concerns over the company's ability to bag orders in this
West and Central space. We believe "supercritical" technology based projects
Girye UMPP SPV Maharashtra 4,000 would be the next growth trigger for the company.
Lara NTPC Chattisgarh 5 x 800
Sasan UMPP Reliance Power Madhya Pradesh 4,000
We continue to remain positive on the stock and reiterate
our Buy recommendation on it with a price target of
Order inflow to remain buoyant Rs2,845. At the current market price it trades at 22.4x
The outlook for the demand for the power generation FY2009E and 16.5x FY2010E earnings. In terms of EV/
equipment continues to remain buoyant owing to the EBIDTA, the stock trades at 15.5x and 11.1x its estimates
for FY2009 and FY2010 respectively.
Recent order wins
Client Project details Rating Type of Value Location
(MW) project (Rs cr)
GSPC Pipavav Power 2 x 350MW advanced class gas turbine 700 Gas 1,893 Pipavav, Gujarat
GSEG 1 x 350MW advanced class gas turbine 350 Gas 1,075 Hazira, Gujarat
GECOL 350MW gas turbine 350 Gas 650 Libya
UPRVUNL 2 x 500MW TPS 1,000 Thermal 3,390 Anpara D, UP
TNEB 1 x 600MW thermal set 600 Thermal 2,475 Chennai
Reliance Industries 345MW gas turbine 345 Gas 900 Raigad
Others 200
Total orders booked 10,583

Investor’s Eye 3 March 14, 2008 Home Next

investor’s eye
Banking
Sector Update
Debt relief package: Mixed bag for PSBs
The finance minister today provided clarifications over the
debt relief package allying most of the concerns raised by
economic experts.
Scheme details
w Provisional estimate of the total expenditure for the
debt relief scheme is pegged at Rs60,314 crore. Of
which, the debt waiver scheme entails allocation of
Rs50,524 crore, while the one-time settlement scheme
(OTS) would be allocated Rs9,790 crore.
w From the beneficiary perspective, maximum benefit
(~84%) would accrue to about three crore small and
marginal farmers, while the remaining benefit (16%)
would be directed towards one crore other farmers.
w Cooperative banks hold the largest portion (55%) of
loans to be waived or covered under OTS, followed by
scheduled commercial banks (35% or Rs21,000 crore)
and regional rural banks, which hold the remaining 10%.
w In return of the loans waived, the finance minister will
reimburse the lending institutions in hard cash over a
period of three years starting from July 2008.
Financing
The scheme expenditure would be financed as a part of
regular budget exercise by utilising tax revenues, which
have been buoyant this fiscal. Further if need arises,
sources such as non-tax revenues, debt receipts and listing
of public sector entities would be considered to finance
the scheme. Borrowing would be considered as a last resort
for financing the scheme.
Time line Amount (Rs cr) % of total
By Aug 2009 40,000 67
Aug 2009-Aug 2010 12,000 20
Aug 2010-Aug 2011 8,000 13
Total 60,000 100
Implications for PSBs
Benefits for public sector banks (PSBs)
In our opinion, the PSBs will benefit from the scheme as
w The reimbursement will be done in the form of hard
cash providing the banks immediate benefit for waiving
the agricultural non-performing assets (NPAs). The
Investor’s Eye
sector update
announcement allays concerns over the form of
reimbursement. Reimbursement in other forms (such
as bonds etc) would have made the scheme less
beneficial for the banks owing to delay in actual
reimbursement.
w The debt relief package is front-loaded in the sense
that nearly Rs40,000 crore of the total allocation would
be provided within 14 months since the start of the
scheme in June 2008. In other words, the lending
institutions will receive major portion of the
reimbursement within 14 months. This is beneficial to
PSBs as the recovery of the agricultural NPAs would have
been evenly spread over about three years.
w The banks would be able to clean up their balance sheets
swiftly and improve their asset quality. Moreover, the
banks would be able to re-deploy the funds of
reimbursement in business activities.
Moral hazard
The government intervention in the form of debt relief scheme
is likely to act as a moral hazard, as this might have adverse
impact on repayment behavior of other agricultural borrowers,
who are regular in paying off their loans. This risk of increase
in delinquencies amongst other agri-borrowers is likely to act
as an overhang on the valuations of PSBs.
Macro implications
Not a major burden on government financials
The government of India intends to allocate the total
expenditure in following manner:
Fiscal year Amount (Rs cr) Addition burden
FY2008 10,000 0.25% of GDP
FY2009 15,000
FY2010 15,000
FY2011 12,000 ê
FY2012 8,000 0.1% of GDP
As evident in the table above, the phased allocation of
debt relief package expenditure is not expected to be a
major burden on government financials. The maximum
burden (in relative terms) would be in FY2008 estimated
at 0.25% of GDP, which is anticipated to decline to 0.1%
towards the end of the scheme.
The author doesn’t hold any investment in any of the companies
mentioned in the article.
4 March 14, 2008 Home Next
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