The Hindu Business Line : BHEL: Buy

WE REITERATE a buy recommendation on the BHEL stock at Rs 1,400. The stock appears to be on a long bull run backed by substantial opportunity to scale up revenues and earnings. At 28 times the trailing 12-month per share earnings, the stock trades at a discount to its large-cap peers such as ABB and Siemens.

The probability of much of the planned one lakh MW capacity going on stream in the next five years appears higher now, given the strong commitment of the Government to stick to implementation schedules. BHEL is well-positioned to garner a substantial portion of this opportunity as it continues to be a preferred supplier and has close to 70 per cent share of the generation equipment market. Strategies such as entry into new geographies globally, introduction of product categories, and tapping the after-market services segment, are paying off and adding to the kitty.

The Government's capacity-addition programme is on track, so far, and the implementation of the next stage, whereby close to 60,000 MW would be added, is also likely to be done at the same pace unlike in earlier years, when there was considerable delay in finalising and awarding contracts. As a higher proportion of the proposed addition is yet to happen, BHEL look forward to a constant flow of big-sized orders in the next four-five years. The company's plans to manufacture higher capacity equipment and expand its manufacturing capacity from 6,000 MW to 10,000 MW could prepare it take on the larger-sized orders.

Access to critical technology could further enhance BHEL's potential to make the most of the business opportunity in the power sector.

The company's tie up with Alstom for super critical boilers and with Siemens for turbines has filled the gap in technology availability that could have otherwise hampered its prospects. The recent 15-year technology transfer agreement with Alstom for 800 MW super critical boilers has made BHEL technically competent to bid for projects using this route. Close to 15 per cent of the new projects coming up are expected to use this technology.

A number of new projects are expected to use higher capacity equipment such as 800 MW or 1,000 MW. Though BHEL has the capacity to make equipment up to 1,000 MW, there has been no demand so far for these. The company now expects the demand to pick up as large projects are planned. It plans to introduce a range of 300 MW, 350 MW, 500 MW and 800 MW equipment. This would hone its edge in procuring orders and help it emerge as a preferred supplier due to its cost-advantage

The renovation and modernisation segment is attracting investments, as it improves generation efficiency substantially at just a fraction of the cost involved in setting up fresh capacities. BHEL has been receiving most of the renovation orders as it rides on the advantage of having supplied the original equipment for most plants.

BHEL also services sets commissioned by foreign players and is cost-effective. This market could throw up opportunities worth Rs 10,000-15,000 crore in the next five years.

In 2004-05, BHEL achieved an all-time high order booking of Rs 1,450 crore from the services sector in — up 53 per cent over the past year.

With the turnover crossing Rs 10,000 crore, this behemoth is yet to see the best. The high base notwithstanding, we expect the company to maintain a steady growth over the next four-five years. Buy with a one/two-year perspective.

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