Target Price = Rs 3500
- With the help of new product launches over the last few years, Bajaj Auto Ltd (BAL) is well poised to take advantage of the secular growth in the two-wheeler market. BAL is likely to consolidate its position in the market further as the new product launches continue.
- The three-wheeler segment, which is a high-margin business, is turning around after a brief lull. The changes in the regulatory regime in favour of vehicles using cleaner fuel is likely to boost the demand for threewheelers
where BAL is the undisputed leader. - With the increased contribution of high-margin vehicles and the softening of the prices of steel, BAL is expected to see a 20% compounded annual growth in its earnings over FY2005-07E.
- The stock is currently quoting at a PER of 19.8x its FY2007E earnings. The investment on the company.s books (Rs 648 per share) and the insurance subsidiaries (Rs 920 per share) add substantial value to BAL.s fair value.
BHEL
Target Price = Rs 2650
- Bharat Heavy Electricals Ltd (BHEL), a leading supplier of power equipment, will be the prime beneficiary of a four-fold increase in the investments (Rs 500,000 crore in the 11th Five-Year Plan as against Rs 112,000 crore in
the 9th Five-Year Plan) being made in the power sector. . - BHEL's current order book of Rs 37,500 crore, ie 3.0x its FY2005 revenue, provides high earnings visibility.
- The power ministry has proposed around five ultra mega power projects entailing a capacity addition of 20,000MW (4,000MW x 5) with the combined turnkey value of at least Rs 80,000 crore.
- BHEL.s recent technology transfer agreement with Alstom for design and manufacture of large-sized (500MW+) super-critical boilers will enable it to bid for the ultra mega power projects. I expect BHEL to bag a fair share out of this huge Rs 80,000-crore potential investment, which in turn will maintain the growth momentum in the company.s order book.
- The stock trades at a PER of 21.4x its FY2007E earnings. BHEL's valuation looks attractive as compared with that of its peers, such as Siemens, ABB and Larsen and Toubro.
