Rs350bn order inflow during the first nine months
BHEL bagged orders worth Rs350bn during the first nine months of this fiscal, thus indicating an outstanding order book position of Rs1.3trn. This order book provides strong earnings visibility for the next ~3 years. This robust order inflow during 9M FY10 translates into order inflow of ~Rs143bn during Q3 FY10. It won orders for the supply of 11.7GW during the first nine months, higher than our estimate. Majority of these orders are from the private sector, indicating its strong presence despite Chinese competition.
Expansion to aid execution
BHEL is scheduled to expand its installed capacity to 15GW from 10GW. It further plans to expand this to 20GW by FY12. We believe this expansion will help the company to overcome execution delays and thus achieve 25% revenue CAGR over FY09-12. Post this expansion the company will be well equipped to capitalize on future growth opportunities.
Easing commodity prices will positively impact margin
In order to overcome supply chain issues, BHEL stocks its key raw materials for a period of four-six months. During FY10 steel prices corrected by ~35% over the corresponding period. This coupled with improving average realizations (due to more supercritical orders) will positively impact margins. This is already visible in the Q2 FY10 results where margins expanded by 375bps.
Better execution and margin improvement will aid 30% earnings CAGR, upgrade to BUY
With the ordering for the XI plan expected to commence soon we believe BHEL is best placed to take advantage of this opportunity. BHEL’s dominance in the sector is seen from the Rs350bn robust order inflow during the first nine months of this fiscal. Expanded capacity will improve its execution cycle. This coupled with better margins will aid 30% earnings CAGR. With an improving margin environment we expect BHEL’s cash position to also improve, thus remain as a net debt free company. We factor in FY12 earnings and upgrade the stock to BUY with a target price of Rs2,803/share.