BHARAT HEAVY ELECTRICALS LTD REPORT

Result Highlight

BHEL continued to report stellar result for Q4FY10, and ahead of Unicon’s estimates. The revenue grew by 28.5% on YoY basis to INR 139bn. The operating profit at INR 27bn was up by 42% on yearly basis. The operating profit margin improved by 186bps to 19.4% on YoY basis. The margin improvement was led by reducedraw material cost (57.6% against 62.2%) and staff cost (12.5% against 13%) as % of sales. The profit after tax for the quarter under review improved by 41.7% on YoY basis to INR 19bn. The per share earning improved to INR 39/share compared to INR 27.5/share for the quarter and for full year, at consolidated level, earning per share stands at INR 88.4/share compared to 63.6/share in FY09.

Segmental performance

Power:

The segment revenue at INR 112bn grew by 29.6% on YoY basis during the quarter (+25.8% for FY10). Power segment contributed 78% to the top-line of the company. The PBIT margin improved by 731 bps to 27.4% on the back of lower staff cost and raw material consumption as a percentage of sales.

Industry:

The segment contributes22% to the top line of the company. During the quarter under review, the segment revenue surged to INR 31,491Mn witnessing growth of 15.9% on YoY basis. For FY10,company’s revenue at consolidated level increased by 8.7% to INR 79bn due to dismal growth in industry during the 1HFY10. The PBIT

margin at 25.6% for the quarter improved by 406bps on YoY basis. Order-book at INR 1.44Tn With order-intake of INR 590bn during FY10, the current order book stands at INR 1.44tn and provides revenue and earning visibility over FY12E. Most of the new contracts were from the private sector in Power and Industrial segment. With NTPC to float bulk tenders (expected during 3QFY11), order placement from private sector gaining momentum and higher 12th Five year plan for Power

segment, the outlook remains buoyant for the company. The management of the company indicates that capacity has been augmented by 50% and revised capacity now stands at 15GW. For FY11, company has set a turnover target of INR 395bn, growth of 16.7% on yearly basis.

Outlook and Valuation

Despite rising competition in the Power segment with local (L&T, Alstom, Bharat Forge etc) and global players (Chinese equipment manufacturer), we expect BHEL to perform better and gain new order intake on the back of its capacity expansion. At the CMP of INR 2320, stock trades at21x its FY11 per share earning. Accumulate with price objective of INR 2,670 (24x its FY11E)