Public sector power equipment major Bhel Ltd’s Rs 5600 crore order from JP Power is the largest one it has got from the private sector and will substantially increase earnings visibility.
During the second quarter ended September 2009, Bhel’s order intake at Rs 8,000 crore was lower by 40% from the year-ago period. And for the six months from April to September 2009, it secured only Rs 15,000 crore worth of orders, although its guidance is to achieve Rs 55,000 crore during FY10.
The order from JP Power is also crucial to Bhel as it comes in the higher supercritical equipment category. Such equipment is typically above the 600 MW category, where realizations are higher than in the sub-critical category. It also brings with it the possibility of another order for phase II of the same project.
By end FY10, Bhel’s order book will be around 4.5 to 5 times its projected FY10 revenues of around Rs 33,000 crore. Besides being significantly better than its closest comparable peer, Larsen & Toubro Ltd, the robust order book assures a top line growth of 23-25% every year until 2012.
Graphics: Naveen Kumar Saini / Mint
According to analysts, until a few years back Bhel’s revenue growth was constrained by a lack of capacity. However, it will add around 20GW of capacity by December 2011, most of which will come into operation by FY10 itself.
Meanwhile, during the first half of FY10, Bhel’s revenues grew by around 26% to around Rs 12,400 crore. Net profit grew by nearly 33% to around Rs 1330 crore. A major part of the improvement in its operating profit margin during the period came from the drop in raw material costs.
While the company is likely to have healthy profit margins of around 17-18% during FY10, these could be under pressure given the stiff competition from Chinese and Japanese competitors. Of course, with higher indigenization of advanced technology, companies such as Bhel and L&T are striving to offer competitive prices. Besides, they bring the advantage of a more reliable service network.
Bhel’s stock trades at around Rs2250. Although it is up from around Rs1500 in April 2009, the share has fallen marginally since the second quarter results. Analysts’ consensus is for earnings per share (EPS) of around Rs89 for FY10 and around Rs112 for FY11. The present share price discounts the FY10 and FY11 earnings around 25 times and 20 times respectively, and is certainly not cheap.
“The order book brings strong revenue visibility. Among the large-cap, capital goods companies, BHEL is poised for the strongest earnings growth during FY11 and FY12,” says Misal Singh, analyst at Edelweiss Securities. That should mean some upside for the stock over the next 12-15 months.