BHARAT HEAVY ELECTRICALS

Competition in the power-equipment space has increased with Thermax inking a JV for supercritical technology. However, Bhel will retain advantages of scale and vendor base, as the competition will take time to build these. Currently, only Bhel and L&T are able to offer the entire boiler-turbine-generator (BTG) package, while the rest are offering boilers or turbines but not both. Bhel has some inherent advantages. The company is undertaking brownfield capex rather than greenfield like the competition; it has an established vendor base; and it is trying to indigenise supercritical technology by tying up with state electricity boards. Private sector orders have dominated inflows this year and this segment is also addressed by Bhel now. Therefore, although RBS expects longterm margins in the industry to trend down, due to the dual effect of new technology absorption and greater competition, Bhel will remain the margin leader. Bhel has a robust backlog of Rs 1.4 trillion and continues to win orders. RBS expects continued policy support in favour of local equipment for power projects, and forecasts a 29% earnings CAGR for Bhel over FY09-12. It remains RBS' top pick among large-cap engineering stocks.