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Add BHEL on decline

June 11, 2008

BHEL won India’s largest gas turbine order worth Rs35bn (US$815mn), thanks to its new advance class gas turbine (ACGT) from GE. BHEL offers a play on the likely increase in India’s gas availability led by Reliance, GSPC and Petronet LNG as this is its third ACGT order in one year. Order inflows from new products and capacity expansion should be the key +ve drivers, with metal prices being a concern.

Pragati Power has placed Rs35bn turnkey order on BHEL for 1,500MW gasbased Pragati III combined cycle project at Bawana. The plant is expected to be commissioned before the Commonwealth Games in 2010.

BHEL had 4 set orders on ACGT Frame 9FA technology – 1x345MW from Reliance Industries & 1050 MW (3x350MW) order from Gujarat Urja Vikas Nigam. With this 1500MW, 4 GT order, BHEL has now doubled its GT orders to 8 sets, improving its economies of scale.

Valuations:BHEL’s order book reaches Rs 915bn, +11%YTD. BHEL is expected to report an EPS of Rs 79 for FY09 and Rs 103 for FY10. BHEL currently trades at 20x FY09E PER vs BSE Sensex at 16x. However, the premium valuation is justified given BHEL’s superior market position, earnings growth (34pct for BHEL vs Market 18pct) and RoE (31pct v/s market 21pct).

Merill Lynch has set a Target Price of Rs 2,250
Lehman Brothers has set a Target Price of Rs 1,818
Citigroup has set a Target Price of Rs 2,529
JP Morgan has set a Target Price of Rs 2,200
CLSA has set a target Price of Rs 2,000

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