Recommendation: Buy
CMP = Rs 1,910 (as of Monday)
Price target: Rs 1,954
Key points
· Bharat Heavy Electricals Ltd (BHEL) had a splendid FY2007, registering a 29% growth in its revenues to Rs 18,739 crore and a 44% increase in its net earnings to Rs 2,414.7 crore. The operating profit margin (OPM) expanded marginally (by 60 basis points) to 19.1%.
· The power business registered a healthy growth of 28% in its revenues while the industrial business recorded a rise of 32% in its revenues during the year.
· It was a remarkable year for BHEL in terms of order inflow, which grew at 88.2% year on year (yoy) to Rs 35,643 crore. Consequently, the order backlog at the end of the year stood at Rs 55,000 crore. BHEL's cash pile stood at a huge Rs 5,808 crore at the end of FY2007, thanks to reduced working capital requirement and lower capital expenditure during the year.
· The company has crafted a "Strategic plan 2012" targeting a turnover of $10 billion by 2012 vs $4 billion at present. In my view, the government's focus on increasing power generation in order to meet its mission of providing "power for all by 2012" would be one of the key catalysts for BHEL's order inflows, providing clear visibility to the company's earnings.
· I believe, in future, the execution capability of BHEL is going to be a key differentiating factor in this business and BHEL, which is a large player, will be better placed to secure the best orders in the industry.
· Hence, I remain bullish on the stock and reiterate Buy recommendation with a price target of Rs 1,954. At the current market price Rs 1,910 the stock is trading at 30.4x its FY2008E earnings and 24.4x its FY2009E earnings.
