12 August 2014
1QFY15 Results Update | Sector:
Capital Goods
BHEL
BSE SENSEX
25,881
Bloomberg
Equity Shares (m)
M.Cap. (INR b) / (USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
S&P CNX
7,727
BHEL IN
2,447.6
547.5/9
292/100
-3/16/50
CMP: INR224
TP: INR300
Buy
1QFY15 operational performance better than estimates
1QFY15 operational performance was better than estimates with Revenues at
INR51b (down 21% YoY, 8% below est) and EBIDTA margins at 4.3% (down 180bp
YoY, vs est of 2.9%). PAT at INR 1.9b, down 58% YoY, was higher than estimates of
INR762m (down 58%) and is supported by other income at INR3.5b / lower tax
rates at 21% (given R&D benefits).
Power segment BTB
stood at 2.5x in 1QFY15 (from lows of 2.3x in Sept 13); we
expect bounce back to 3.0x in FY15. We believe that improvement in BTB is an all
important trend, and has ramifications on several cyclical components. Rising
trend in debtors had been arrested (down 6% QoQ).
Order awards
in 1QFY15 stood at just INR11b, given the elections. BHEL is
favorably positioned in ~4GW of projects. During FY15, expect 16-17GW of
project awards (vs 6GW YoY).
Net provisions
in 1QFY15 stood at just INR510m (vs INR2.4b YoY) and thus SGA
expenses have been curtailed. Provisions / LDs accounted for 7.5% of revenues in
FY14 vs 4.0% in FY13; and with improved liquidity / accelerated execution, we
expect stabilization in these factors to more normative levels.
Staff cost
was up 7% YoY given impact of BHPV merger; expect retirements at
2,200 employees in FY15 (of which 729 have retired in 1QFY15).
Financials & Valuation (INR Million)
Y/E Mar
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
2015E 2016E 2017E
36,228 49,603 62,823
24,587 37,321 48,362
10.0
-32
142
7.3
7.3
22.3
1.6
15.2
52
151
10.4
10.2
14.7
1.5
19.8
30
164
12.5
12.4
11.3
1.4
Net Sales 323,738 356,813 397,098
BTB remains steady 2.5x: election impasse impacts 1QFY15 order finalization
Costs supported by cyclical factors; expect retirements at ~2,200 in FY15
Valuations and view
We maintain
Buy
with Price Target of INR300/sh (20x FY16E).
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Amit Shah
(Amit.Shah@MotilalOswal.com)
/
Nirav Vasa
(Nirav.Vasa@MotilalOswal.com)
Investors are advised to refer through disclosures made at the end of the Research Report.

BHEL
1QFY15 operational performance better than estimates; supported by
cyclical factors
BHEL’s 1QFY15 operational performance was better than estimates: Revenues
at INR51b (down 21% YoY, 8% below estimates) and EBIDTA margins at 4.3%
(down 180bp YoY, better than estimate of 2.9%). Net Profit at INR1.9b (down
58% YoY) was higher than estimates of INR762m (down 58%) and is supported
by other income at INR3.5b / lower tax rates at 21% (given R&D benefits).
Revenues continued to remain impacted given slow moving orders from private
sector (at ~18% of the order book), and also delayed execution due to lack of
regulatory clearances, local issues, delays in payment / LCs, etc. EBIDTA margins
at 4.2% is commendable given the poor fixed cost absorption, with staff costs at
31% (up 780 bps YoY), SGA expenses at 14.8% (vs 14.9% in 1QFY14), and
RM costs as % of revenues at 50.4% (down 590bps).
Staff cost
stood at INR15.7b in 1QFY15 (up 7% YoY) largely given the impact of
BHPV merger in August 2014 (~1,100 employees absorbed by BHEL); and thus
adjusted costs are marginally lower YoY. Employee count at the end of 4QFY14
was at 47,525 down by 870 in FY14 (despite addition of 1,100 employees of
BHPV). Even in FY15, management expects retirements at 2,200 employees (of
which 729 have retired in 1QFY15).
Material costs
are also likely to improve given various initiatives like design to
cost, improved localization (post completion of one year of operations of the
first supercritical unit by end FY15), etc.
Net provisions
in 1QFY15 stood at just INR510m (vs INR2.4b YoY) and thus SGA
expenses have been curtailed. Importantly, in FY14, provisions stood at
INR22.6b (vs INR15.6b in FY13) and also liquidated damages at INR6.3b (vs
INR3.5b YoY); thus these factors accounted for 7.5% of revenues in FY14 vs 4.0%
YoY. Improved liquidity conditions and accelerated execution will further lead to
stabilization in these factors to more normative levels, going forward.
Revenues down 20% YoY given constrained environment
Revenues(INR b)
Revenue growth (% YoY)
EBITDA margins impacted by negative operating leverage
Adjusted EBITDA margin
Source: MOSL, Company
Source: MOSL, Company
12 August 2014
2

BHEL
Segmental performance: Execution remains constrained
1QFY15 Power sector revenues declined 23% YoY at INR41b, while Industry
revenues were down 12% YoY at INR11b. Power sector EBIT margins stood at
12.7% vs 14.1% YoY, while Industry segment EBIT stood at 3.5%, vs 10.1% YoY.
The Industry business has failed to provide support, given the dependence on
captive power (50%+ of revenues); also the traction in transportation segment
has been much below expectations given the delayed decision making in
Railways. Margins have been impacted given the increased revenue contribution
from projects.
Also, in the power business, as we understand, the list of slow-moving orders
continues to be substantial with 7.5GW of capacity, contributing 18% to BHEL's
power sector order book (management stated that slow moving orders stand at
INR120b).
BHEL: Segmental performance
INR m
Revenues
Power
Growth (%)
Industry
Growth (%)
EBIT
Power
Growth (%)
Industry
Growth (%)
EBIT margin (%)
Power
Industry
1Q
66,712
53,786
(20.5)
12,926
(34.4)
8,899
7,589
(37.1)
1,311
(68.3)
13.3
14.1
10.1
FY14
2Q
3Q
93,156
89,195
75,764
73,196
(15.4)
(11.9)
17,392
15,999
(15.4)
(28.5)
10,942
10,984
(37.9)
-42
(101.0)
11.7
14.5
-0.2
14,402
12,084
(20.6)
2,318
(43.3)
16.1
16.5
14.5
4Q
154,316
122,108
(21.4)
32,208
(25.8)
29,622
23,354
(42.5)
6,268
(33.1)
19.2
19.1
19.5
FY15
1Q
52,772
41,442
(23.0)
11,331
(12.3)
5,645
5,250
(30.8)
395
(69.9)
10.7
12.7
3.5
Source: Company, MOSL
Slow Moving Orders at 18%+ of power sector order book, focus shifts to public sector for
execution
May-09
Mar-10
May-09
Jul-09
Mar-10
Mar-10
Mar-11
Mar-11
Sep-10
Oct-11
Mar-12
Project
Korba West Power Co Ltd
Bela TPP, Maharashtra
OPG Power, Gujarat
Malibrahmani, Angul TPP
Surana Power, Raichur TPP
Usha Jayaswal TPP
Indiabulls Nashik - Phase II
Indiabulls Amravati - Phase II
Raigarh TPP
Singrauli
Vizag
Total
% of Power sector order book
Customer
Avantha
Ideal Energy
OPG
Monnet Power
Surana Power
Abhijit Group
Indiabulls
Indiabulls
Visa Power
Dainik Bhaskar
Abhijeet Projects
INR B
12.9
7.0
6.8
13.2
11.4
12.7
28.9
28.9
13.3
37.8
6.3
179.1
20
Source: Company, MOSL
MW
600
270
270
525
420
540
1,350
1,350
600
1,320
300
7,545
12 August 2014
3

BHEL
Order intake muted at INR11b in 1QFY15, expect 16-17GW awards in FY15
The management stated that BHEL is favorably positioned in ~4GW of projects
including: i) 1320MW Ennore SEZ (EPC, INR78b) ii) 6X196MW Pranhita Lift
Irrigation (~INR25-30b) iii) 500MW Tuticorin (BTG, INR12b) iv) 1GW of Pakal DUL
Hydro power with Patel Engg (~INR90b JV share) v) 4X111MW Vishnugad
Pipalkoti Hydro project, etc. Order inflow was impacted by slower decision
making process because of elections in 1QFY15.
During FY15, 16-17GW of projects is likely to be awarded, largely from the state
sector. Of this, the management stated that NTPC projects awards are likely at
5.5GW (4X660MW Bareithy, 2X660MW Khargone, 2X660MW Katwa), Hydro
projects at 2.5GW, etc.
Order backlog at the end of 1QFY15 stood at INR974b, down 10% YoY. Power
sector intake in 1QFY15 was just INR3.1b (largely spares) and Industry at
INR8.2b (Solar plant EPC, Transformers, Traction Motors, etc).
BHEL is favorably positioned in ~4GW projects
Order intake (INR b)
BTB has witnessed a cyclical uptick to 2.5x in 1QFY15
Order book (INR b)
Book-to-bill ratio ( x TTM)
Source: MOSL, Company
Source: MOSL, Company
BHEL is favorably positioned in 4GW capacity, expect industry pipeline at
16-17GW in FY15 (vs 6.2GW awards in FY14)
BHEL’s order intake had declined from peak levels of ~INR600b in FY10/FY11 to
average levels of INR270b in FY12/FY13. Thus, FY14 intake at INR280b had
remained at similar levels. Our statistical analysis of the macro data-points on
demand and supply dynamics in the power sector suggests that the new cycle of
powergen capex could commence over the next 12-15 months. 'Timing the
recovery' remains the key moving variable. However we believe that what
matters is not 'timing the project awards', but the time when markets believe
that project awards 'could possibly' commence. And that time is now.
(Refer our
detailed Thematic - BTG ordering: Emerging from the 'Eclipse', December 2013).
Industry awards in FY14 stood at 6,210MW, and management expects a pipeline
of 16-17GW of projects to be awarded in FY15. These are largely from the
government sector, and exclude the UMPP projects (bidding undergoing for 2
projects of 8GW capacity).
BTB maintained at 2.5x in 1QFY15: a key trend driving cyclical factors
For 1QFY15, BHEL’s BTB stood at 2.5x (from lows of 2.2x in Sept 13). Also, Power
segment BTB had improved to 2.5x in FY14 (from lows of 2.3x in Sept 13); we
expect bounce back to 3.0x in FY15.
4
12 August 2014

BHEL
Focus on cash realization led to a cash surplus situation after a gap of 4 years in
FY14; also the rising trend in debtors had been arrested (1QFY15 debtors have
declined 6% QoQ). We believe that improvement in BTB is an all important
trend for capital goods companies, and has ramifications on several cyclical
components including working capital, operating free cash flows and operating
leverage.
Takeaways from concall
Execution is likely to improve, with projects even in the private sector like
Lalitpur, Bara, Monnet, etc seeing some pick-up. Also, for new intake, the
company is offering a lower execution period, and management expects
projects particularly in Andhra Pradesh / Telangana, etc to avail this.
Railway project at Bhilwara continues to be on drawing board. For the solar PV
manufacturing plant, the location is under finalization and the company has
sought CCEA approval for capital subsidy of INR10b (project cost INR27b).
BHEL is launching a new super critical boiler based on own design, which can
switch between 100% indigenous and imported coal. The management believes
that this could be an important differentiation.
Valuations and view
At the CMP of INR224, BHEL trades 22x / 15x its FY15e / FY16e EPS of
INR10/15.2 and trades 11x / 6.6x its FY15E / FY16E on EV / EBITDA basis.
Maintain
Buy
rating on the stock with TP of INR300.
12 August 2014
5

BHEL
BHEL: an investment profile
Company description
Key investment risks
BHEL is India’s dominant producer of power and
industrial machinery and a leading EPC company,
established in the late 1950s as the government’s
wholly-owned subsidiary.
The company has 14 manufacturing divisions, 8
service centers, 4 power sector regional centers
besides project sites spread across all over India and
abroad.
It has a manufacturing capacity of 20GW spread
across multiple factories in India; including for
thermal, hydro and gas projects.
20% of the order book (~ INR 200b) is slow
moving.
Increase in retention money, due to delay in
project commissioning schedules.
Industry segment is majorly dependent on captive
power orders for its order inflows. Other
segments like transportation & power T&D are
still in developing stage.
Recent developments
Key investment arguments
BHEL is strongly exposed to cyclical factors: i)
Contribution margins at ~42% vs EBIDTA margin of
12% in FY14, leading to a meaningful operating
leverage ii) Core NWC stable at ~200 days; cyclical
factors of Retention money (at ~200 days in FY14E
vs 55-60 days in FY07-09) and customer advances
(deteriorated from 63% of revenues in FY09 to 34%
in FY13) that impacted NWC to normalize.
We expect Operating Cash Flows to improve from
average of ~INR20b in FY10-13 to ~INR92b in
FY15/16E.
Chinese Electric Power Design Institute has
challenged TANGENCO’s order award worth
INR92.1b to BHEL for their Ennore project.
BHEL is planning to enter retrofit business of
utility power plants, as the pace of order
finalization continues to be delayed.
Valuation and view
We maintain
Buy
with a Price Target of INR300/sh
(20x FY16E). We expect BHEL to report EPS of
INR9.8/sh (down 33.7%) in FY15 and INR14.9/sh
(up 52%) in FY16.
Sector view
We maintain our positive view on the sector.
Comparative valuations
P/E (x)
P/BV (x)
EV/Sales (x)
EV/EBITDA (x)
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
FY15E
FY16E
BHEL
22.3
14.7
1.6
1.5
1.2
0.9
11.0
6.6
L&T
36.5
25.4
36.5
25.4
2.2
1.7
19.8
16.4
Crompton
31.2
16.8
3.8
3.2
0.9
0.8
15.2
10.4
EPS: MOSL forecast v/s consensus (INR)
MOSL
Forecast
10.0
15.2
Consensus
Forecast
12.4
13.7
Variation
(%)
-19.7
10.9
FY15
FY16
Target price and recommendation
Current
Price (INR)
224
Target
Price (INR)
300
Upside
(%)
33.9
Reco
Buy
Shareholding pattern (%)
Jun-14
Promoter
DII
FII
Others
63.1
16.6
15.9
4.4
Mar-14
63.1
16.5
16.1
4.3
Jun-13
67.7
12.2
15.0
5.1
Stock performance (1-year)
Note: FII Includes depository receipts
12 August 2014
6

BHEL
Financials and valuations
Income statement
Y/E Mar
Revenues
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
(INR Million)
2014
2015E
2016E
2017E
383,888 323,738 356,813 397,098
-19
-16
10
11
45,198 36,228 49,603 62,823
11.6
10.9
13.6
15.4
9,829
35,369
1,326
16,160
253
50,456
15,849
31.4
34,608
36,303
-45
11,066
25,163
1,782
12,254
0
35,634
11,047
31.0
24,587
24,587
-32
12,364
37,239
1,877
17,953
0
53,315
15,995
30.0
37,321
37,321
52
13,912
48,910
1,985
22,163
0
69,089
20,727
30.0
48,362
48,362
30
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2014
14.8
18.8
135.0
2.8
19.1
2015E
10.0
14.6
141.5
3.0
30.0
2016E
15.2
20.3
151.4
4.6
35.1
2017E
19.8
25.4
164.3
5.9
35.1
15.1
11.9
1.7
10.1
1.3
10.9
11.0
1.2
372.9
91.4
100.8
-0.3
22.3
15.4
1.6
11.1
1.3
7.3
7.3
1.0
347.0
94.4
84.7
-0.4
14.7
11.0
1.5
6.6
2.0
10.4
10.2
1.0
275.8
92.6
87.8
0.1
11.3
8.8
1.4
4.6
2.6
12.5
12.4
0.9
250.7
89.0
89.7
0.1
Balance sheet
Y/E Mar
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2014
4,895
325,575
330,471
26,548
-19,690
337,329
119,135
72,005
47,131
6,220
4,202
650,670
97,976
399,530
118,729
34,435
370,894
267,633
103,260
279,776
337,329
2015E
4,895
341,533
346,428
26,734
-19,690
353,473
129,424
83,070
46,354
5,000
4,202
601,896
85,791
315,379
173,581
27,146
303,979
202,188
101,792
297,917
353,473
(INR Million)
2016E
2017E
4,895
4,895
365,754 397,141
370,649 402,036
26,734 26,734
-19,690 -19,690
377,694 409,081
143,214 160,004
95,434 109,347
47,780 50,658
5,000
5,000
4,202
4,202
642,462 693,177
92,771 99,274
276,353 279,489
244,868 284,333
28,469 27,555
321,750 343,955
214,384 84,550
107,366 113,522
320,712 349,221
377,694 409,081
E: MOSL Estimates
Cash flow statement
Y/E Mar
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2014
50,203
9,829
0
1,326
15,849
40,073
54,628
-6,879
90
0
-6,789
-5,035
12,396
1,326
12,465
-6,431
41,408
77,321
118,729
2015E
35,634
11,066
0
1,782
11,047
47,384
73,760
-9,069
0
0
-9,069
0
187
1,782
8,244
-9,839
54,851
118,729
173,581
(INR Million)
2016E
53,315
12,364
0
1,877
15,995
40,807
98,144
-13,790
0
0
-13,790
0
0
1,877
11,190
-13,066
71,287
173,581
244,868
2017E
69,089
13,912
0
1,985
20,727
969
73,559
-16,790
0
0
-16,790
0
0
1,985
15,319
-17,304
39,465
244,868
284,333
12 August 2014
7

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BHEL
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