BHEL’s FY08 net profit grew only 17.8% Y-O-Y due to capacity constraints and the shortage of key forging components, while EBITDA margin fell due to higher wage provisioning of the sixth pay commission. As a result, EPS for the year was Rs58.4, compared with our estimate of Rs64.9.
The current order book stands at Rs914.5 billion, which is 4.7x FY08 revenues. Order inflows for FY09 will remain strong as the management expects inflows worth Rs450 billion.
However, there could be a slowdown in the order book in FY10 with the completion of the XIth five-year plan orders and the beginning of the XIIth five-year plan orders.
The company added 4,000 MW to its existing capacity of 6,000 MW in Dec07. We believe that the additional capacity will get stabilized over the next 3-4 months and help ease out the capacity constraint. Furthermore, the management plans to increase the capacity to 15,000 MW by December 2009.
To eliminate the shortage of key forgings, BHEL has placed advance orders and is also thinking of manufacturing these on its own.
We have lowered our FY09 EPS estimate by 14% because of unimpressive results and the fact that the new capacity of 5,000 MW will be operational only by Dec’09.
Nevertheless, we estimate a healthy EPS CAGR of 35.1% over the next two years. At the current price, the stock is trading at a forward revised P/E of 17.9x and 13.8x for FY09E and FY10E earnings, respectively.
Based on our DCF valuation, we are of the opinion that the stock is undervalued at the current levels, and hence we reiterate our rating of BUY with a target price of Rs1,695 over a 12-month period, which offers an upside of 15.2% from the current levels.