3 March 2015
Update | Sector: Capital Goods
TP: INR320 (17%)
Beginning of a new dawn
BTG ordering to be up meaningfully; Expanding product portfolio
Business possibilities ‘Revving
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Free float (%)
AvgVal(INRm)/Vol ‘000 1,512/6,605
Financial Snapshot (INR Billion)
2015E 2016E 2017E
292.7 303.6 346.1
EPS Gr. (%)
Div Yield (%)
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.
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
BTB inched up to 3.4x in 3QFY15: a key trend driving cyclical factors
22 3982 5410
22 3029 5126
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
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