Stock Review: BHEL

BHEL has started feeling the heat of intense competition emerging in the super-critical turbine generator space. The Bharat ForgeAlstom, France (BFA) joint venture has emerged as the lowest bidder in the NTPCDamodar Valley Corporation's 7,260-Mw (11 units of 660Mw each) supercritical turbine generator bulk tender. While NTPC is yet to award the final contract, BHEL will fulfil a part of the contract, according to the tender conditions, with the lowest bidder and the second-lowest bidder supplying five units and four units, respectively.

The outcome highlights the emergence of competition from multinational giants and new local players besides Chinese suppliers. With more players entering the space, capacities are expected to rise to 19,500 Mw (boiler) and 15,000 Mw (turbine generator) by 2013-14, in addition to BHEL's 15,000 Mw in each segment.

Since L&T was disqualified in the NTPC-DVC tender, it is likely to become more aggressive. Also, other new players are now pre-qualified to bid for super-critical turbine generators. Thus, prospects for a player like BFA winning more orders are bright. This will affect BHEL's order inflows, revenue growth, margins and superior return profile in the long term.

As a result, analysts have become wary of the outcome of the boiler package contract (11,660 Mw), where apart from BHEL and L&T, companies like Gammon-Ansaldo and BGR-Hitachi have been qualified. Moreover, NTPC's next round of bulk tender of 5,600 Mw by the end of 2010-11 is also likely to see intense competition.

But, over the medium term, BHEL remains well-placed with an order book to 2009-10 sales ratio of 4.5 times and is set to witness robust order inflows led by bulk tenders and another 6,500-7,000 Mw from joint ventures between the company and state utilities.

Competition from multinational giants and new local players, besides Chinese suppliers, may affect order book