3 March 2015
Update | Sector: Capital Goods
BHEL
BSE Sensex
29,459
S&P CNX
8,957
CMP: INR274
TP: INR320 (17%)
Buy
Beginning of a new dawn
BTG ordering to be up meaningfully; Expanding product portfolio
Business possibilities ‘Revving
up’
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Free float (%)
n
BHEL IN
2,447.6
670.2/10.8
300/161
-7/3/24
36.9
n
AvgVal(INRm)/Vol ‘000 1,512/6,605
Financial Snapshot (INR Billion)
Y/E Mar
2015E 2016E 2017E
Net Sales
292.7 303.6 346.1
EBITDA
Adj PAT
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
Payout (%)
Valuations
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div Yield (%)
37.3
1.9
21.1
0.5
22.5
1.8
12.4
0.9
15.5
1.7
8.4
1.3
25.7
18.0
7.3
-50.0
5.3
7.7
20.0
37.3
29.8
12.2
66.1
8.4
12.1
20.0
48.3
43.2
17.7
45.0
11.3
16.0
20.0
n
140.6 149.9 163.3
BTG award pipeline is showing signs of strong recovery in FY16 with ~18-
20GW likely to be awarded. This is meaningfully higher than our previous
estimate of ~10-12GW, and compares with project awards of 6.3GW in
FY14 / ~10-11GW in FY15E. This could be a tipping point, particularly for the
equipment manufacturers, given that industry capacity for super-critical
boilers and turbines stands at ~21-24GW pa. The largest delta change v/s
previous estimate is led by NTPC, and we now expect 12GW to be awarded
in next 12-15 months (incremental 6.9GW v/s previous estimates).
BHEL has been L1 in ~3GW of projects including: i) 1.3GW Udangudi (EPC,
~INR78b) and ii) 1.1GW Manuguru project (INR54b, on nomination basis,
Telangana). Thus, the cumulative L1 pipeline of BHEL stands at INR184b,
and we believe that orders worth at least INR140b would be accounted for
in Mar 2015. This will entail healthy news flow in project awards.
New segments like solar PV cell manufacturing and Defense indigenization
opens up interesting avenues. BHEL has plans to set up an integrated
manufacturing facility for 480MW Solar PV systems (Wafers-Cells-Modules),
with a 40% capex subsidy (project cost INR27b) from National Clean Cess
Fund. In Dec 2014, BHEL, Hindustan Shipyards and Mishra Dhatu Nigam
have formed a consortium to bid for construction of six Scorpene
submarines (INR530b order).
BHEL is exposed to cyclical factors: i) contribution margins at ~42% versus
expected EBITDA margin of 12.4% (adjusted) in FY14, leading to a
meaningful operating leverage, ii) core NWC stable at 200 days; cyclical
factors of retention money (at 181 days in FY14 versus 55-60 days in FY07-
09) and customer advances (deteriorated from 63% of revenue in FY09 to
38% in FY14), that impacted reported NWC are expected to normalize as we
expect BTB to increase from 3.4x currently to 3.8x in FY16E.
We expect operating cash flow to improve from an average of ~INR40b pa
in FY13-14 to INR73b pa in FY15E-17E.
We maintain
Buy
with target price of INR320 (PER of 18x FY17E). Our target
multiple of 18x is based on average one-year forward PER during FY06-11, a
period when the power sector ordering was robust.
The key variables to watch out are the impact of the Pay Commission
recommendation (effective Jan 2017) and could be an important swing
factor. Another important variable is the coal mine auctions.
Strong operating leverage, cyclical factors aid recovery
n
n
BTB inched up to 3.4x in 3QFY15: a key trend driving cyclical factors
n
n
Satyam Agarwal(AgarwalS@MotilalOswal.com);+91
22 3982 5410
Amit Shah(Amit.Shah@MotilalOswal.com);+91
22 3029 5126
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

BHEL
#1
Project pipeline building-up; NTPC to potentially award 12GW in next
12-15 months
BTG pipeline is showing signs of a strong recovery in FY16 with projects of ~18-
20GW likely to be awarded in the next 12-15 months. This is meaningfully higher
than our previous estimate of ~10-12GW, and compares with project awards of
6.3GW in FY14 / ~10-11GW in FY15E. We believe that project awards of 18-20GW
could be a tipping point, particularly for the equipment manufacturers, given that
industry capacity for super-critical boilers and turbines stands at ~21-24GW pa.
The largest delta change vs
previous estimates is led by
NTPC, as we now expect
incremental 6.9GW to be
awarded
n
n
n
n
The largest delta change v/s previous estimates is led by NTPC, and we now
expect Pudimadaka (4GW, Andhra Pradesh), Ramagundem (1.6GW, Telangana)
and Maitree Project (1.3GW, Bangladesh) to be also awarded in the next 12-15
months. This is in addition to existing pipeline of projects including: 1.3GW of
Khargone (L&T is L1), 2.6GW of Barethi (where four consortiums have submitted
bids) and 1.3GW of Katwa rebid (Doosan was earlier L1).
We expect possible project awards of 5-7GW by the state sector from a pipeline
comprising of: Maharashtra (4.6GW), Bihar (2.6GW), Uttar Pradesh (1.3GW),
Tamil Nadu (1.3GW) and Haryana (0.8GW).
In addition, Telangana and Andhra Pradesh are likely to potentially award ~8-
10GW of new projects, of which we believe ~4-5GW can be awarded in the next
15 months. Telangana state government has recently awarded contracts to
BHEL for 1.9GW at Kothagudem and Manuguru, and has entered into MOU to
cumulatively award 6GW of projects. AP Genco is also planning to set up 2.4GW
extension plants at three locations in Krishnapatnam, Vijayawada and
Kothugundem; and we believe that few of these projects will be awarded in
FY16.
Central Government has approved automatic transfer of coal linkages from old
and inefficient plants (more than 25 years old) in public sector to new
supercritical plants, being set up in the same state. Union Budget FY16 mentions
about five UMPP projects of 4GW each on a ‘Plug and Play’ method. This also
opens up interesting possibilities over the medium term.
Exhibit 1: Telangana power demand supply - Severe power deficit
MUs
FY15
FY16
FY17
FY18
FY19
Energy Requirement
54998
63047
67902
77164
84496
Energy Availability (Existing Sources)
45795
45037
44030
43896
43754
Energy Deficit
-9203
-18010
-23872
-33268
-40742
Energy Deficit, %
-16.7%
-28.6%
-35.2%
-43.1%
-48.2%
Source: Report of the Task Force on Energy, Govt of Telangana, Nov 2014
3 March 2015
2

BHEL
Exhibit 2: 44GW thermal capacity are ~25 years old, can
potentially be replaced by supercritical plants (GW)
44GW of cumulative
thermal capacity
commissioned till March
1990 are ~25 years old
Exhibit 3: Several states like UP, Telangana, Punjab, AP,
Bihar, etc have large deficits
Peak Deficit (%)
Source: CEA
Data from April – Nov 2014; Source: CEA
We understand that a part
of the coal mine auctions
will be earmarked towards
setting up Case 2 projects,
which could add to the
potential pipeline
Exhibit 4: Potential pipeline of ~34GW to be awarded over next 2-3 years, largely from the
Central / State sector
Project
Udangudi
Tuticorin
Khargone
Barethi
Katwa
Ramagundem
Pudimadaka
Lakhisarai
Maitree Project
Ghatampur
Pirpainty
Gorakhpur
Telangana
Bhusawal
Chandrapur
Koradi
Latur
Krishnapatnam,
Vijayawada, Kothugundem
Panipat Thermal (Unit 9)
Orba Extension
Hardauganj Extension
Potential Pipeline
Owner
TN Genco
NTPC
NTPC
NTPC
NTPC
NTPC
Bihar (26%) - NTPC (74%)
NTPC
Neyveli
Bihar (26%) – NHPC (74%)
Nuclear Power
Mahagenco
Mahagenco
Mahagenco
Mahagenco
Andhra Pradesh
Haryana
UPRUVNL
UPRUVNL
Sector
State
Private
Central
Central
Central
Central
Central
Central
Bangladesh
Central
Central
Central
State
State
State
State
State
State
State
State
State
Cap (MW)
1,320
525
1,320
2,640
1,320
1,600
4,000
1,320
1,320
1,980
1,320
1,400
4,000
660
1,320
1,980
1,320
2,400
660/800
600
660
~34,000
Source: MOSL, Company
Comments
BHEL is L1
BHEL is L1
L&T is L1
Key states that are likely to
award projects include
Telangana, Andhra Pradesh,
Tamilnadu, Maharashtra,
Bihar, Uttar Pradesh, etc.
Several of these states face
power deficits, given the
regional imbalances
Nuclear
MOU with BHEL
3 March 2015
3

BHEL
#2
BHEL’s intake in 4QFY15 could be robust given large L1 pipeline
BHEL’s management, in the recent concall, stated that the company is L1 in ~3GW of
projects including: i) 1,320MW Udangudi (EPC, ~INR78b), ii) 500MW Tuticorin (BTG,
INR12b), iii) 1GW of Pakal DUL Hydro power with Patel Engg (~INR90b JV share,
BHEL likely at INR10b), iv) 1.2GW Pranhita Lift Irrigation (INR30b), and v) 1.1GW
Manuguru project (INR54b, on nomination basis, Telangana).
Thus, the cumulative L1 pipeline of BHEL stands at INR184b, and we believe that
orders worth at least INR140b would be accounted for in March 2015. This will
entail a very healthy news flow in terms of project awards.
During FY15, we model BHEL’s order intake at INR308b (up 10% YoY); intake in
9MFY15 stands at INR207b. Thus, the asking run-rate in 4QFY15 is INR101b. We
believe that the actual intake could possibly be higher than our estimates, and we
would be watchful of the trends.
Exhibit 5: Expect BTB to bounce back to 3.8x in FY16E, from
lows of 2.3x in 2QFY14
Power Orderbook (INR B)
BTB (x)
Exhibit 6: BHEL’s order intake in 4QFY14 could possibly
stand at INR140b, as L1 pipeline gets converted (INR B)
Order intake (INR b)
Source: MOSL, Company
Source: MOSL, Company
#3
Solar / Defence: few more steps forward
We believe that Solar Cell
manufacturing / EPC and
Defence could be
interesting drivers in the
medium term
BHEL is expanding its product portfolio and going forward, we believe that new
segments like solar PV cell manufacturing and Defense indigenization opens up
interesting avenues.
n
n
BHEL has signed MoU with Solar Energy Corporation, PGCIL, SJVNL, Sambhar
Salts and Rajasthan Electronics for setting up a 4GW Ultra Mega Solar Power
Project at Sambhar, Rajasthan. Also, BHEL has plans to set up an integrated
manufacturing facility for 480MW Solar PV systems (Wafers-Cells-Modules). The
company has approached the National Clean Cess Fund to get a 40% capex
subsidy, of the total project cost of INR27.3b. The Union Budget FY16 has raised
the clean energy cess to INR200/ton (earlier INR100/ton) and the collections are
estimated at INR140-150b pa. This is substantial and with improved fund
availability, we believe that capex subsidy approval will be expedited.
In Dec 2014, BHEL, Hindustan Shipyards and Mishra Dhatu Nigam came together
to form a consortium to bid for the construction of six Scorpene submarines.
BHEL already is bidding for several naval application guns, including 76/62 Super
4
3 March 2015

BHEL
Rapid Gun Mounts and integrated platform management systems, which would
also open up interesting possibilities.
Project 75i: six diesel-electric submarines (cost of ~INR530b+)
Project 75i, to acquire six diesel-electric submarines, was cleared in Oct 2014 by the
Defense Acquisition Council at a cost of ~INR530b under the ‘Buy & Make’ (Indian)
category. The decision comes nearly four years after the Indian Navy first released a
request for information. This represents a departure from the navy’s earlier plan in
which two submarines were planned to be imported from a foreign yard and four
built at Indian yards under collaboration. We believe that Mazgaon Dock (already
building six Scorpene submarines under Project 75i), L&T (Hazira yard had fabricated
the hull of INS Arihant and three other boats in its class), Hindustan Shipyard
(completed INS Sindhukriti's refit which included completely rebuilding parts of the
submarine like conning tower etc), and Pipavav Defense are the possible
contenders. Recently, BHEL, Mishra Dhatu Nigam and Hindustan Shipyards came
together to form a consortium to build submarines indigenously. For BHEL, we note
that it can leverage the manufacturing facilities of BHPV, which is located very near
to Hindustan Shipyard’s facilities.
Exhibit 7: BHPV manufacturing located just ~10kms from Hindustan Shipyard
Source: MOSL, Company
Solar an important driver, with ambitious targets
Ministry of New Renewable Energy has revised its target of renewable energy
capacity to 175GW till 2022, comprising 100GW Solar, 60GW Wind, 10GW Biomass
and 5GW Small Hydro.
To expedite project execution and provide a ‘Plug and Play’ concept, the Ministry
has approved setting up of 25 solar parks each with capacity of 500MW (financial
support of INR41b from Central Government) with a targeted capacity of 20GW. In-
principle approvals for setting up Solar Parks have been given in Gujarat, Andhra
3 March 2015
5

BHEL
Pradesh, Uttar Pradesh, Meghalaya, Rajasthan, Madhya Pradesh, Tamil Nadu,
Karnataka, Punjab and Telangana. Projects under Central/State Schemes shall come
up in these Solar Parks.
Key solar plant capacity additions announced
n
Support of INR10b to Central PSUs to set up 1GW of grid connected solar
projects.
n
Setting up 300MW of Solar projects by Defense and Para Military
establishments (INR7.5b as VGF).
n
Development of 100MW Grid Connected Solar PV Power Plants on Canal Banks
and Canal Tops during the 12th Plan period at cost of INR10b and with Central
Financial Assistance of INR2.3b.
n
Grid Connected Solar PV Power Projects with VGF (750 MW).
n
Grid Connected Solar PV Power Projects (3.3GW) by NTPC and other PSUs.
n
Ultra Mega Solar Power projects in Rajasthan, Gujarat, TN and Ladakh.
Exhibit 8: Industrial segment to be an important medium
term driver (INR b)
Industry
Exhibit 9: Industrial
(FY12-14)
segment
revenue
composition
Source: MOSL, Company
Source: MOSL, Company
3 March 2015
6

BHEL
Strong operating leverage, cyclical factors aid recovery
BHEL is strongly exposed to cyclical factors: i) contribution margins at ~44% versus
expected EBIDTA margin of 12.4% (adjusted) in FY14, leading to a meaningful
operating leverage, ii) core NWC stable at 200 days; cyclical factors of Retention
money (at 181 days in FY14 versus 55-60 days in FY07-09) and customer advances
(deteriorated from 63% of revenue in FY09 to 38% in FY14) that impacted reported
NWC are expected to normalize as we expect power segment BTB to increase from
3.4x in Dec 2014 to 3.8x in FY16.
Expect EBITDA margin to bottom in FY15, aided by operating leverage
n
n
We expect BHEL’s EBITDA margin to decline from 19.4% in FY13 to 8.8% in
FY15E, and improve to 12.3% in FY16E/13.9% in FY17E. During this period, we
expect contribution margins at ~44%, and thus the expectations of margin
expansion are largely a function of operating leverage, particularly staff costs
(19.3% in FY17E, v/s 20.7% in FY15E) and provisions, including Liquidated
Damages (at 1% in FY17E v/s 5.8% in FY14).
Staff cost for BHEL is largely fixed in nature and resulting into a very strong
operating leverage: during FY01-12, staff cost declined meaningfully from 23.9%
of revenue to 11.4%, and given the poor operating leverage, we expect the
same to increase to 21% of revenues in FY15E. Provisions also have a cyclical
character and are a function of the execution stage of projects. Given the
meaningful cost and time overruns in project execution over the last two to
three years, the quantum had increased meaningfully to 5.8% of revenue in
FY14. We expect the increased quantum of writebacks in FY16E/17E, and thus
expect net provisions at 1-1.5% of revenue and then normalizing at ~2.5-3.5%
from FY18E onwards.
Exhibit 11: Expect employee attrition to average at ~2,500-
3,000pa during FY15E-17E
Employee (000 Nos)
Cost (INRm/employee)
Exhibit 10: Expect staff costs at 21% of revenue in FY15E,
thus completing a full circle (INR b)
Staff cost
Staff cost, % of revenues
Source: MOSL, Company
Source: MOSL, Company
3 March 2015
7

BHEL
Exhibit 12: Net provisions are contingent on the stage of
project execution and liquidity conditions (% of revenue)
Net Provisions + LDs (%)
Exhibit 13: EBITDA margin to bottom in FY15E, expect
margins to expand in FY16E/17E aided by operating leverage
EBITDA (INR b)
EBITDA Margin (%)
Source: MOSL, Company
Source: MOSL, Company
Operating cash flows to improve; core NWC stable
n
n
A large part of the variation in BHEL’s reported net working capital is being
driven by cyclical factors such as retention money (at 181 days in FY14 v/s 55-60
days in FY07-09) and customer advances (deteriorated from 63% of revenue in
FY09 to 38% in FY14, but stable as a percentage of order book at 12-14%). While
the core net working capital has been fairly stable at ~200 days, the reported
number has been volatile from negative 24 days in FY09 to 154 days in FY14. As
the cyclical factors correct, we expect the reported NWC to improve from 154
days in FY14 to 76 in FY17E.
As we expect the above cyclical factors, impacting NWC, to support in FY15/16,
we expect operating cash flows to improve from an average of ~INR40b pa in
FY13-14 to INR73b pa in FY15E-17E. Even during FY14, operating free cash flow
had improved meaningfully to INR54.2b v/s INR24.4b in FY13. This will lead to a
meaningful increase in net cash from INR92b in FY14 to INR260b in FY17E (~40%
of current market cap).
Exhibit 14: NWC volatility - a function of cyclical factors; expect meaningful improvement in FY16/17 (days)
FY02 FY03 FY04
NWC (Structural Factors)
Debtors (excl Retention)
Inventories
Loans and Advances
Sundry Creditors
Other Liabilities
Core NWC
NWC (Cyclical factors)
Retention Money
Customer Advances
Provisions
Reported NWC
220
107
53
99
17
264
190
105
50
96
17
232
185
96
47
79
15
234
FY05
211
112
47
80
17
273
FY06 FY07 FY08 FY09
164
102
33
77
14
208
148
89
24
75
12
174
173
108
22
84
14
206
164
109
34
81
15
211
FY10
155
103
31
84
14
190
FY11 FY12
163
100
30
74
19
200
172
105
23
84
9
207
FY13 FY14 FY15E FY16E FY17E
177
90
22
80
14
195
199
93
30
90
21
211
208
97
37
82
25
235
198
95
33
80
23
222
177
91
31
84
20
195
25
101
29
158
25
95
37
125
25
143
49
68
18
176
47
68
32
150
40
50
57
165
47
20
54
215
56
(12)
58
229
64
(24)
75
213
42
10
89
187
70
32
104
154
59
97
129
124
69
131
181 232 187 157
139 163 183 173
98 119 114 102
76
154 186 111
Source: MOSL, Company
3 March 2015
8

BHEL
Exhibit 15: Retention money largely function of negotiation
with customers, expect quantum to decline (INR b)
Retention Money
No of days (x)
181
104
129
232
187
157
Exhibit 16: Customer advances remained stable (as % of
order book), but volatile as % of revenue
Client advances, % sales
Client advances, % OB
25 25 25 18 32
57 54 58
75
89
Source: MOSL, Company
Source: MOSL, Company
3 March 2015
9

BHEL
Valuation and view
Maintain Buy, Revised Price Target of INR320 (18x FY17E PER)
We expect BHEL to report an EPS of INR7.3 in FY15E, INR12.2 in FY16E, INR17.7 in
FY17E. At the CMP, the stock quotes at PER of 37.3x FY15E / 22.5x FY16E/ 15.5x
FY17E. We maintain
Buy
with target price of INR320/sh (PER of 18x FY17E). Our
target multiple of 18x is based on average one-year forward PER during FY06-11, a
period when the power sector ordering was robust.
Please see our detailed report
on BHEL dated 12 January 2015
Key investment arguments
n
n
n
n
Our macro analysis suggests that normative industry ordering will stand at ~20-
24GW pa (power demand at 1.6BUs in FY20E). The journey from 6-7GW pa in
FY14 to 10-12GW pa in FY15E-17E and then at 20-24GW pa provides interesting
possibilities.
Project pipeline has been building up, particularly for BHEL, given that the
company has bagged projects on nomination basis and also intends to leverage
cash reserves for equity stage to bag EPC contracts. Over the past three years,
BHEL has expanded its offerings in the power segment meaningfully and will
also enable it to capture a larger share in project execution, going forward.
Company is making efforts to expand the contribution from industry business,
particularly transmission and transportation segments. Going forward, new
segments like solar PV cell manufacturing and Defense indigenization also opens
up interesting possibilities.
BHEL is strongly exposed to cyclical factors: i) contribution margins at ~42%
versus expected EBITDA margin of 12.4% (adjusted) in FY14, leading to a
meaningful operating leverage, ii) core NWC stable at 200 days; cyclical factors
of retention money (at 181 days in FY14 versus 55-60 days in FY07-09) and
customer advances (deteriorated from 63% of revenue in FY09 to 38% in FY14),
that impacted reported NWC would normalize as we expect power sector BTB
to increase from 3.4x currently to 3.8x in FY16E. We expect operating cash flow
to improve from an average of ~INR40b pa in FY13-14 to INR73b pa in FY15E-
17E. Thus, net cash is likely to increase from INR92b in FY14 to INR260b in FY17E
(~40% of current market cap).
Key risks/variables
n
n
The key variable to watch out is the impact of Pay Commission’s implementation
in FY17 and could be a vital swing factor. However, we believe that a part of the
impact will be mitigated by productivity improvements /operating leverage over
the medium term, and thus the impact is possibly not structural.
Another variable is the uncertainty on coal block de-allocations and mine
auctions, which could delay the order pipeline.
Key Triggers
n
n
Projects awards, particularly 1.3GW Udangudi (Tamilnadu) and 1.1GW
Manuguru (Telangana).
Successful coal mine auctions, sustained ramp up in Coal India production.
3 March 2015
10

BHEL
Exhibit 17: BHEL: one-year forward PE
48
36
24
12
0
8.6
17.6
18.5
PE (x)
Peak(x)
Avg(x)
Min(x)
40.9
Exhibit 18: BHEL: one-year forward PB
PB (x)
12.0
9.0
6.0
3.0
0.0
0.9
4.2
1.3
Peak(x)
Avg(x)
Min(x)
10.7
3 March 2015
11

BHEL
Exhibit 19:
BHEL
:
Operating metrices
FY06
Order Intake (INR b)
Power (GW)
Power (INRM/MW)
Power
R&M
Industry
Internatl. Business
Cancellations
Total Order Intake
% YoY
Segmental Revenues
Power
Industry
Internl. Business
Total Revenues
EBITDA Margins (%)
Contrib. Margins (%)
Staff Costs (%)
Other Expenses (%)
Employees (in 000)
INR M/empl
Cash / (Debt), INR B
Cash
Retention Money
Debt
Net Cash / (Debt)
INR/sh
Net Profit (INR b)
EPS (INR / sh)
RoE (%)
3.4
27
90
19
47
33
-
189
4%
FY07
9.7
25
245
32
60
19
-
356
88%
FY08
14.6
27
387
24
69
23
-
503
41%
FY09
17.0
26
444
28
92
33
-
597
19%
FY10
16.5
24
401
19
135
36
-
590
-1%
FY11
15.1
29
443
21
114
37
-
605
2%
FY12
3.9
45
176
23
79
2
58
221
-63%
FY13
9.6
24
227
29
41
20
-
317
43%
FY14
4.5
38
170
34
50
26
-
280
-12%
FY15E
5.3
35
184
40
60
25
-
308
10%
FY16E
7.0
35
245
46
75
25
-
391
27%
FY17E
7.3
35
256
53
105
25
-
439
12%
98
37
10
145
18.9
43.3
13.7
10.7
42.6
0.4
127
50
11
187
20.4
43.3
13.9
9.0
42.6
0.6
159
44
11
214
18.9
44.4
15.8
9.7
42.1
0.6
213
56
12
280
15.7
38.5
15.4
7.4
43.6
0.9
269
57
16
342
17.7
40.4
15.7
6.9
45.7
1.4
348
90
12
450
19.9
40.3
13.5
9.5
46.3
1.2
379
102
15
495
20.3
41.5
11.4
9.4
46.7
1.1
396
100
6
502
19.4
42.1
11.9
10.9
49.4
1.2
325
62
16
403
12.0
40.8
14.8
14.1
48.4
1.2
228
53
18
299
8.8
45.3
20.7
15.8
47.5
1.3
233
56
21
310
12.3
44.4
20.3
11.8
44.9
1.4
264
64
25
353
13.9
43.7
19.3
10.4
42.1
1.6
41
12
-6
47
19
17
6.9
25.2
58
27
-1
84
34
24
9.9
30.0
84
28
-1
111
45
25
10.3
25.7
103
42
-1
144
59
36
14.6
30.1
98
68
-1
164
67
47
19.2
32.5
96
97
-1
192
79
57
23.2
31.4
67
135
-1
200
82
69
28.2
30.3
77
168
-14
232
95
66
26.9
23.5
119
190
-27
282
115
36
14.7
11.3
149
183
-26
305
125
18
7.4
5.3
230
152
-26
356
146
30
12.2
8.4
286
146
-26
406
166
43
17.7
11.3
Source: Company, MOSL
3 March 2015
12

BHEL
BHEL: What went wrong…What company did…What is the underlying potential?
Euphoria!! (2007-2009)
Phase of excesses! Perennial
power deficit! Sky-rocketing
prices! BTG project awards at
30GW+ pa...record levels
What has company done in last five
years?
What went wrong in
the five years?
Industry ordering declined
from peak levels of ~30-
35GW pa during FY07-10 to
~6-10GW pa levels during
FY12-15.
Post NTPC bulk tender, BTG prices
declined by ~20-25% over the last 4
years; despite increased commodity
prices. Competitive intensity was severe
with foreign players contributing 43% of
the current projects under construction
in the country.
Industry business failed to provide support in a
constrained environment as ~60% of the
revenues were largely from Captive Power
plants.
Expanded capacity from 7GW to ~20GW. Also
built capabilities for EPC execution, expanded
offerings (in terms of Auxillaries / Balance of Plant
to capture increasing part of the value addition),
rationalized cost structure, improved operational
efficiencies, etc.
Attempt to broad-base revenues in
segments like Transportation
(Greenfield unit for MEMU,
expanding locos capacity), Defence
Renewable (solar manufacturing),
Power T&D (HVDC, STATCOM,
765kva transformers, GIS, etc). R&D
spend increased to 2.8% of revenues
in FY14, several projects expedited
on a Mission mode.
Self-correction
(2010-2014)
Reality hits! SEBs
curtail high-cost
power. Hibernation
in project awards
What is the
underlying
potential?
Meaningful
operating leverage,
both on P&L (staff
costs at 21% of
revenues in FY15E,
vs 11.4% in FY12)
and Balance Sheet
(core NWC stable at
~200-210 days,
while reported NWC
at 154 days in FY14
vs negative 24 days
in FY09). Expect net
cash to increase
from INR92b in FY14
to INR286b in FY17E
(~45% of mkt cap).
2007
9 January 2015
BHEL’s PRICE PERFORMANCE
2015
4

BHEL
Exhibit 20: Macro Power Demand / Supply analysis suggests that the next cycle of powergen capex to kickstart in the next
12-18 months
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
FY19E
Power Requirement
GDP
9.3%
6.7%
8.6%
8.9%
6.7%
4.5%
4.9%
5.8%
6.5%
7.5%
8.0%
8.0%
Elasticity to GDP
growth
0.8
0.8
0.8
0.4
1.3
1.4
0.1
1.5
1.3
1.1
1.1
1.1
Requirement (MUs) 739,345 777,039 830,300 861,591 937,199 995,557 1,002,257 1,088,702 1,177,159 1,274,274 1,386,410 1,508,415
Demand Growth
7.1%
5.1%
6.9%
3.8%
8.8%
6.2%
0.7%
8.6%
8.1%
8.3%
8.8%
8.8%
Capacity (MW)
Hydro
Coal
Gas
Diesel
Nuclear
Renewables
Total
Generation (MUs)
Hydro
Coal
Gas
Diesel
Nuclear
Total
Growth (%)
Base Deficit (%)
35,909 36,878 36,863 37,567 38,990 39,491 40,531
76,049 77,649 84,198 93,198 112,022 130,221 145,273
14,656 14,877 17,056 17,706 18,381 20,110 21,782
1,202
1,200
1,200
1,200
1,200
1,200
1,200
4,120
4,120
4,560
4,780
4,780
4,780
4,780
11,125 13,242 15,521 18,455 24,503 27,542 29,463
143,061 147,965 159,398 173,626 199,877 223,344 243,029
41,901
160,273
21,782
1,200
4,780
32,463
262,399
43,701
174,773
21,782
1,200
6,180
35,963
283,599
45,701
190,273
21,782
1,200
7,580
39,463
305,999
47,201
206,273
21,782
1,200
7,580
42,963
326,999
48,701
222,273
21,782
1,200
7,580
46,463
347,999
123,423 112,361 103,896 114,257 130,510 113,720 134,731 132,140 133,989 140,121 144,720 149,319
490,210 511,247 514,732 535,340 584,787 691,555 746,087 849,417 964,539 1,091,751 1,228,729 1,362,980
68,778 67,399 92,517 100,257 93,464 66,836 44,522
43,886
49,610
57,243
57,243
57,243
2,285
1,868
2,000
2,000
2,000
2,000
2,000
16,776 14,716 18,654 26,285 32,287 32,866 34,228
33,498
43,309
53,121
53,121
53,121
699,187 718,658 765,832 822,064 872,392 912,057 961,552 1,060,942 1,193,448 1,344,235 1,485,812 1,624,662
5.8%
2.8%
6.6%
7.3%
6.1%
4.5%
5.4%
10.3%
12.5%
12.6%
10.5%
9.3%
5.4%
7.5%
7.8%
4.6%
6.9%
8.4%
4.1%
2.5%
-1.4%
-5.5%
-7.2%
-7.7%
Capacity addition (MW)
Hydro
1,256
Coal
4,927
Gas
964
Diesel
-
Nuclear
220
Renewables
3,365
Total
10,732
969
1,600
221
-2
-
2,117
4,904
-15
6,549
2,179
-
440
2,279
11,432
704
9,000
650
-
220
2,934
13,508
1,423
18,824
675
-
-
6,048
26,970
501
18,199
1,729
-
-
3,039
23,468
1,040
15,052
1,672
-
-
1,921
19,685
1,370
15,000
-
-
-
3,000
19,370
1,800
14,500
-
-
1,400
3,500
21,200
2,000
15,500
-
-
1,400
3,500
22,400
1,500
16,000
-
-
-
3,500
21,000
1,500
16,000
-
-
-
3,500
21,000
Utilization/PLF(%)
Hydro
39.2% 34.8% 32.2% 34.7% 38.2% 32.9%
Coal
73.6% 75.2% 69.8% 65.6% 59.6% 60.6%
Gas
53.6% 51.7% 61.9% 64.6% 58.0% 37.9%
Nuclear
46.5% 40.8% 46.7% 62.8% 77.1% 78.5%
Coal PLF in FY19 at 70% calculated as: Centre 80%, Private 70%, State 65%
37.9%
58.6%
23.3%
81.7%
36%
61%
23%
80%
35%
63%
26%
80%
35%
35%
35%
66%
68%
70%
30%
30%
30%
80%
80%
80%
Source: Company, MOSL
3 March 2015
14

BHEL
Financials and valuations
Income Statement
Y/E March
Total Income
Change (%)
Staff Cost
Mfg. Expenses
Selling Expenses
EBITDA
Change (%)
% of Net Sales
Depreciation
Interest
Other Income
Extra-ord. Items (net)
PBT
Tax
Rate (%)
Reported PAT
Adjusted PAT
Change (%)
2010
333,545
25.4
52,432
198,857
23,059
59,196
40.3
17.7
4,580
335
11,549
73
65,903
22,800
34.6
43,103
46,839
31.3
2011
404,443
21.0
54,769
230,816
38,325
80,532
36.0
19.9
5,441
547
10,206
5,305
90,055
29,945
33.3
60,110
56,650
20.9
2012
479,788
18.8
54,654
280,845
45,213
99,076
23.0
20.6
8,000
513
12,656
-193
103,026
32,623
31.7
70,403
68,922
21.7
2013
484,247
0.8
57,528
280,156
52,665
93,898
-5.2
19.4
9,534
1,253
11,217
-4
94,324
28,177
29.9
66,147
65,540
-4.9
2014
391,088
-19.4
59,338
231,565
54,987
45,198
-51.9
11.6
9,829
1,326
16,160
-60
50,143
15,535
31.0
34,608
35,887
-45.2
2015E
292,664
-25.2
60,620
159,989
46,334
25,722
-43.1
8.8
10,600
776
11,486
0
25,831
7,879
30.5
17,953
17,953
-50.0
2016E
303,627
3.7
61,646
168,884
35,789
37,308
45.0
12.3
10,867
1,105
17,260
0
42,596
12,779
30.0
29,817
29,817
66.1
(INR Million)
2017E
346,149
14.0
66,744
195,038
36,102
48,264
29.4
13.9
11,636
1,111
25,811
0
61,328
18,092
29.5
43,236
43,236
45.0
Balance Sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Differed Tax Liability
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Debtors
Cash & Bank Balance
Loans & Advances
Other Current Assets
Curr. Liab. & Prov.
Creditors
Other Liabilities
Provisions
Net Current Assets
Appli. of Funds
E: MOSL Estimates
2010
4,895
154,278
159,174
1,278
-15,272
145,179
65,801
41,647
24,154
15,296
798
429,348
92,355
206,888
97,901
28,137
4,069
324,417
75,798
204,439
44,180
104,931
145,179
2011
4,895
196,643
201,538
1,021
-21,636
180,924
80,497
46,488
34,009
17,338
4,392
515,229
108,521
274,656
96,302
32,654
3,096
390,043
80,526
224,790
84,728
125,186
180,924
2012
4,895
248,837
253,732
1,234
-15,462
239,504
97,066
54,098
42,968
13,476
4,617
591,237
135,487
357,405
66,720
30,118
1,506
412,794
108,717
218,656
85,421
178,443
239,504
2013
4,895
299,546
304,441
14,152
-15,507
303,086
107,832
63,248
44,585
11,716
4,292
625,187
117,638
398,882
77,321
29,347
2,000
382,694
104,313
180,918
97,462
242,493
303,085
2014
4,895
325,575
330,471
26,548
-19,690
337,329
120,505
73,576
46,929
6,421
4,202
650,670
97,976
399,530
118,729
31,910
2,525
370,894
94,839
169,074
106,981
279,776
337,329
2015E
4,895
339,219
344,115
26,250
-19,690
350,675
130,231
84,704
45,527
5,000
4,202
602,661
76,048
346,400
148,798
28,890
2,525
306,715
64,300
147,443
94,971
295,947
350,675
2016E
4,895
361,881
366,776
26,250
-19,690
373,336
139,521
95,571
43,950
5,000
4,202
650,407
77,374
313,597
230,360
26,551
2,525
330,223
65,521
168,448
96,253
320,185
373,336
(INR Million)
2017E
4,895
394,740
399,636
26,250
-19,690
406,196
148,811
107,207
41,604
5,000
4,202
712,605
84,799
310,496
286,154
28,631
2,525
357,215
78,224
179,678
99,313
355,391
406,196
3 March 2015
15

BHEL
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Change (%)
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Return Ratio (%)
RoE
RoCE
Turnover Ratios
Debtors (Days)
Inventory (Days)
Creditors. (Days)
Asset Turnover (x)
Leverage Ratio
Debt/Equity (x)
2010
19.1
31.3
21.0
65.0
4.7
26.5
2011
23.1
20.9
25.4
82.3
6.2
25.4
2012
28.2
21.7
31.4
103.7
6.4
22.3
2013
26.8
-4.9
30.7
124.4
5.4
20.0
8.1
7.1
5.0
1.0
1.8
2.0
32.5
51.4
221
103
84
13.6
-0.8
31.4
52.3
241
100
77
11.7
-0.6
30.3
49.3
263
105
83
11.0
-0.5
23.5
35.2
290
90
79
10.7
-0.3
2014
14.7
-45.2
18.7
135.0
2.8
20.0
11.1
8.7
6.7
0.8
1.2
1.0
11.3
16.1
362
93
89
8.2
-0.2
2015E
7.3
-50.0
11.7
140.6
1.5
20.0
37.3
23.5
21.1
1.9
1.9
0.5
5.3
7.7
423
97
81
6.3
-0.3
2016E
12.2
66.1
16.6
149.9
2.4
20.0
22.5
16.5
12.4
1.6
1.8
0.9
8.4
12.1
369
95
79
6.8
-0.4
2017E
17.7
45.0
22.4
163.3
3.5
20.0
15.5
12.2
8.4
1.2
1.7
1.3
11.3
16.0
321
91
83
8.2
-0.6
Cash Flow Statement
Y/E March
PBT bef. EO Items
Add : Depreciation
Interest
Less : Direct taxes paid
(Inc)/Dec in WC
CF from Operations
EO Income
CF from Op. Incl. EO Items
(Inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Investments
(Inc)/Dec in Networth
(Inc)/Dec in Debt
Less : Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2010
65,830
4,580
335
22,800
-54,151
21,345
73
21,418
-17,756
3,589
-275
-18,031
3,135
-216
335
11,216
-8,632
-5,245
103,147
97,902
2011
84,750
5,441
547
29,945
-36,596
36,198
5,305
41,503
-17,339
18,860
-3,593
-20,932
-6,369
-256
547
14,999
-22,171
-1,599
97,901
96,301
2012
103,218
8,000
513
32,623
-78,991
-4,588
-193
-4,780
-13,097
-17,685
-225
-13,322
6,169
213
513
17,960
-12,091
-30,194
96,302
66,720
2013
94,329
9,534
1,253
28,177
-14,873
24,456
-4
24,452
-9,390
15,065
325
-9,065
-43
12,918
1,253
16,406
-4,784
10,602
66,720
77,322
2014
50,203
9,829
1,326
15,535
24,026
54,269
-60
54,209
-6,879
47,390
90
-6,789
-4,657
12,396
1,326
12,425
-6,012
41,408
77,321
118,728
2015E
25,831
10,600
776
7,879
34,296
45,153
0
45,153
-7,777
37,376
0
-7,777
0
-298
776
6,234
-7,307
30,069
118,729
148,798
2016E
42,596
10,867
1,105
12,779
34,962
97,926
0
97,926
-9,290
88,636
0
-9,290
0
0
1,105
5,970
-7,075
81,562
148,798
230,360
(INR Million)
2017E
61,328
11,636
1,111
18,092
7,743
75,230
0
75,230
-9,290
65,940
0
-9,290
0
0
1,111
9,035
-10,145
55,794
230,360
286,154
3 March 2015
16

BHEL
Corporate profile: BHEL
Company description
n
Exhibit 21: Sensex rebased
n
n
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.
Exhibit 22: Shareholding pattern (%)
Dec-14
Promoter
DII
FII
Others
63.1
17.3
16.0
3.7
Sep-14
63.1
16.9
15.7
4.3
Dec-13
67.7
12.0
15.6
4.7
Exhibit 23: Top holders
Holder Name
LIC of India
Comgest Growth PLC A/C. Comgest Growth Emerging
Lazard Asset Management LLC A/c Lazard Emerging
Magellan
LIC of India Market Plus -1 Growth Fund
% Holding
9.4
1.2
1.2
1.1
1.0
Note: FII Includes depository receipts
Exhibit 24: Top management
Name
B Prasada Rao
Designation
Chairman & Managing Director
Exhibit 25: Directors
Name
B Prasada Rao
P K Bajpai
R Krishnan
Atul Sobti
T N Veeraraghavan
Name
W V K Krishna Shankar
A N Roy
Harinder Hira
S K Bahri
Rajesh Kumar Singh
*Independent
Exhibit 26: Auditors
Name
Anjaneyulu & Co
J V Ramanujam & Co
Patel Mohan Ramesh & Co
S B A & Co
S N Dhawan & Co
Vardhaman & Co
Vinay Kumar & Co
Wahi & Gupta
Type
Statutory
Statutory
Statutory
Statutory
Statutory
Statutory
Statutory
Statutory
Exhibit 27: MOSL forecast v/s consensus
EPS
(INR)
FY15
FY16
FY17
MOSL
forecast
7.3
12.2
17.7
Consensus
forecast
9.1
11.1
15.4
Variation
(%)
-19.6
10.4
15.2
3 March 2015
17

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