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Coverage of BHEL + GMR + Punj LLoyd + GVK Infra Stocks

February 10, 2010

In continuing our coverage on the Indian Capital Goods Space, we present to you the latest views on the street.

BHEL – BHEL’s order book at the end of 9M FY10 stood at Rs1,340 bn, recording an 18% yoy growth rate. This is significantly below the yoy growth rate of 37% at end-FY09, reflecting increasing competition and unfavorable base effect. Surplus equipment supply in the domestic market is likely by FY2012, leading to pressure on pricing.

Consensus FY11 EPS estimates for the company has fallen from about Rs122 in Nov 2009 to Rs110 now. Goldman’s FY11E [Rs 100] and FY12E EPS [Rs 113] estimates are still 11% and 18% below consensus. Goldman Sachs has a SELL rating on BHEL with a target price of Rs 1,761. Goldman Sachs has come out with a bold SELL call on BHEL.

However, Bofa-Merrill does not agree with Goldman and expects BHEL to perform better with Focus on Private IPPs to retain market share. Merrill expects BHEL’s EPS to be Rs 114 and Rs 143 for FY11 and FY12 with a BUY rating and a target price of Rs 2,750. JP Morgan’s target price is Rs 2,650.

GMR Infrastructure – GMR has an attractive infrastructure portfolio, the bulk of its projects will only start contributing meaningfully post FY12. The power assets currently under construction and development are likely to start contributing only in FY2013E. Both Goldman and Merrill are NEUTRAL and have set a target price of Rs 63 on GRM Infra on the basis of Sum of the parts valuation with bulk of it coming from GMR’s core airport operations, real estate assets associated with the airport property, roads and power assets.

JP Morgan has set a target price of Rs 75 on GMR with EPS expectations of

Punj Lloyd Limited – Punj Lloyd’s order book at the end of 9MFY09 stood at Rs234bn, up 7% on a yoy basis. Orders in Africa account for 43% of the current order book. Revenue growth could continue to be tepid, until
execution on these large African orders ramps up. Expect sales CAGR of 24% over FY10E-FY12E and an EPS CAGR of 37% over the same period.

Goldman’s 12-month target price of Rs236 for the company is based on 1.8X FY2011E BVPS with a NEUTRAL rating. Punj Lloyd currently trades at FY11E P/E of 12.9X [EPS 13.73]

GVK Power & Infrastructure – GVK company reported strong Q3FY10 numbers, with net income up 105% on a YoY basis. The key drivers were strong traffic growth at the road BOT and a doubling of contribution from the Mumbai Airport on a sequential basis. Expect sales CAGR of 16% over FY10E FY12E and an EPS CAGR of 50% over the same period.

Goldman has a NEUTRAL rating with a target price of Rs 48 on GVK.

Bofa-Merrill has set a target of Rs 57 on GVK with EPS expectations of 3.28 for FY11, which does not appear to be justified in our opinion. JP Morgan also has set a target of Rs 56.

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