BackBNP Paribas Securities puts BUY on Bhel
BNP Paribas Securities puts BUY on Bhel
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In line with our thesis of improving execution rates based on expanded manufacturing facilities, work force additions, and tying of critical castings and forgings, Bhel management raised their guidance to 25-30% y-o-y sales growth from 25% y-o-y.
We are increasing sales estimates by 4.3% y-o-y and 3.3% y-o-y in FY09 and FY10, respectively. We are also factoring in lower raw material prices for FY10 (by 57bps) given SAIL and other domestic firms have lowered steel prices by Rs4000-6,000/tonne.
Street’s current liquidity concerns leading to delays by Balance-of-Plant (BOP) vendors are overdone and we believe it will have a limited impact on Bhel’s topline growth.
Based on our analysis of higher equipment only orders versus EPC orders in the current order book along with the company’s expectation that ~85% of FY09 sales will be from BTG equipment sales, we see limited impact of BOP delays in FY09.
The company has received more than 14GW of orders in FY09 so far. It is now aggressively aiming for more private sector orders given that Bhel’s pricing disadvantage versus Chinese manufacturers has diminished to ~5% due to 33% YTD appreciation of Renminbi against the Rupee.
Its capacity additions are on track and we expect the company will be bidding aggressively for private orders. Its capacity additions of another 5GW by December 2009 are on track from the current capacity of 10GW.
The stock trades at a P/E multiple of 14.82x our FY10 EPS estimate compared with Indian peers at median of 13.98x.
We lower our target price to Rs1,600 (assign a P/E multiple of 16.8x) from Rs1,800 to factor in current risk aversion in capital markets.
BHEL is our conviction pick given highest revenue visibility of 4x, improving execution and margins. We believe premium valuations will sustain and maintain our BUY rating.
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