BHEL

   BHEL, the capital goods major, has underperformed the Sensex despite recording continued profit in the range of 20-40% over the past four quarters and promising outlook. The company has generated a return of less than 65% over the past 12 months; significantly lower than the Sensex and its other peers. While FY09 was muted in terms of financials with less than 10% profit growth, the company is back with 34% growth in 9MFY10. The company, which would be declaring its flash results for FY10 later this week, is likely to maintain its growth rate for the full year. The company is currently trading at around 30 times its trailing 12-month earnings, which makes it a considerably-attractive option. Investors can consider taking exposure in the stock from a medium-to-longterm outlook.

BUSINESS:

The company is manufacturer of a complete range of power generation equipment, with a market share of about 65% in the domestic market. It has recently completed the expansion of its capacity from 10,000 mw to 15,000 mw at a cost of about Rs 3,200 crore, and is further expanding it to 20,000 mw by the end of FY12, which would require an additional expenditure of Rs 1,500 crore. 

   While it was generating most of its revenues from PSUs so far, in the past few quarters, the trend has considerably changed with private sector companies accounting for 85-90% of fresh orders received by the company. Its business is structured around two segments: power and industry, with the first segment accounting for nearly 75% of revenues and profits. Further, in the industry sector also, significant revenue is recorded from captive power industry, which in turn is a part of power sector. As a result, its fortunes are closely linked to power sector, which the company is now trying to de-risk. It is expanding its product portfolio and venturing into manufacture of diesel and electric locomotives. It is also actively seeking diversification into nuclear power generation and non-renewable sources, especially solar power, which is expected to witness high growth in the longer run. The company is also present in the exports market, which can act as a buffer in case of creation of domestic overcapacity in the next 3-5 years. The company has also taken steps to maintain its lead in the super-critical range of equipment through various technology-transfer agreements and equity stake. The company has taken 26% equity stake in a number of joint ventures formed with the state generation utilities, which will implement the generation projects based on supercritical equipment. This will help popularise these equipment with the generation companies, while reducing the risk for them.

FINANCIALS:

The result for December 2009 quarter was quite impressive with 18% growth in net sales and 35% growth in net profits. Raw material, the major cost item, grew by only 10%, providing operating profit gain of 2.5 percentage point. Even though the commodity prices have risen considerably in the global market over the past few months, the company is favourably placed for the next 2-3 quarters, as it has to maintain the raw material inventory of nearly four quarters. However, other cost such as staff cost rose by 33%, whereas tax provision also rose by 35%. The company's nine months' financials is also impressive with 23% sales growth and 34% profit growth. The company is further expected to post a better final quarter sales figure as the company, like other projects-based company, has traditionally posted higher Q4 growth.

OUTLOOK :

The outlook for the company is very strong with continued inflow of orders, streamlining of new capacities that will aid volume growth, continued capacity addition in power sector and expansion of transmission network. The company has a huge orderbook position of Rs 1,34,000 crore, which is four-a-half-times its trailing four quarters' sales. In fact, its orders have risen faster than the sales over the past few years, which should become more manageable after the current round of expansion. While the first half of this fiscal being somewhat muted in terms of fresh orders, orders received during Q3 was nearly 60% higher than the average of the first two quarters of FY10, and can actually go up further in the next few months on the back of a bulk order from NTPC. The real challenge for Bhel would arise only after 2-3 years, when companies such as L&T, JSW Energy start their power equipment manufacturing operations. Until then, the company is expected to outperform, and investors may consider taking exposure in this stock.