We expect Bhel to record strong revenue/profitability growth over the medium-term as its huge order backlog is executed. Capacity constraints, however, would lower its book-to-bill ratio.
An all-time high order backlog of Rs1,170 billion would enable the company to report revenues of Rs361.7 billion in FY11E, a three-year CAGR of 22.3%.
Over the same period, its EPS is expected to increase to Rs103.3 (20.9% CAGR). EBITDA margins are estimated to expand from 16.5% in FY09E to 20.9% in FY11E.
Bhel’s order inflows have peaked out in FY09 and would de-grow as equipment for expansion under 11th FYP is in place and ~40% of equipment required for 12th FYP (92,475MW) is already ordered.
Moreover, Bhel’s capacity expansion will complete only in Dec 2009, hindering higher revenue booking. Book-to-bill ratio would thus decline from 5.9 in FY09E to 4.6 in FY11E.
The company’s historical one-year forward P/E ranged from 6x-32x across cycles vs. 20x (avg.) during 2005-09 and 20.7x currently.
The stock trades at a 48% premium to the market and would enjoy a relative premium due to Bhel’s higher profit growth vis-à-vis markets.
The 18x target P/E multiple (~10% discount to long-term avg.) is thus justified. We recommend a HOLD on the stock with a PO of Rs1,850.
Key risks: Project implementation delays, severe undercutting by new or international players and Delays in company’s capacity expansion.
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