The Hindu Business Line : BHEL: Buy

Investors can consider exposure in Bharat Heavy Electricals (BHEL) with a medium-term perspective. Since the markets are likely to remain volatile in the near-term, any weakness linked to the broad market can be utilised to step up exposure. Strong order backlog, capacity expansion to meet demand and robust capex lined up for power projects augur well for the company's earnings growth. At the current market price, the stock trades at 16 times its likely earnings for FY08.

BHEL's present order book is robust at over Rs 50,000 crore — about three times its FY06 revenues. While the high order book does raise concerns of timely execution, BHEL's capacity expansion plan to 10,000 MW, appears to be running on schedule. The capacity, once on stream, will provide comfort on execution capabilities. The company also has an in-principle approval from the Government for further expansion through acquisition of small-sized units. Given the company's comfortable cash position and low debt equity ratio, such acquisitions are likely to help efficient execution of the burgeoning order book and protect its margins. With a successful track record in Government projects, the company may continue to enjoy its preferred supplier status. However, it will have to play on a more competitive field in the `super-critical' equipment segment.

BHEL's renovation/modernisation and spares/services segment has also witnessed robust growth. The company is likely to benefit from NTPC and State-owned units spending on equipments when they reach the replacement threshold.

BHEL has negotiated raw material cost pressures better than many engineering companies. The operating profit margins at 21 per cent for the quarter ended December 2006 is superior to peers. About 60 per cent of its orders have inbuilt escalation clauses. Further, domestic central utilities and international bidding rules provide for escalation clauses for raw material prices.

BHEL has, in the past, lost to Korean and Chinese players in international bidding for super critical segment. While it has subsequently entered into technology tie-ups with Siemens and Alstom, it does not preclude these international majors from bidding independently. Any slowdown in the Government spending for power projects remains a principal risk.