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Wednesday, March 16, 2016

BHEL: Buy
CMP: Rs.106.15
Bharat Heavy Electricals (BHEL) has achieved another milestone in its After-Sales-Service business by successfully synchronizing the 110 MW Unit-7 at Barauni Thermal Power Station (TPS) in Bihar following Renovation and Modernisation (R&M). Following the successful R&M, the working life of the machine, that was first commissioned in May, 1985, has been extended by another 15-20 years.

With the successful commissioning of Unit-7 at Barauni TPS, BHEL has once again showcased its inherent strength for R&M and uprating of old thermal power plants through in-house state-of-the-art technology, engineering capabilities and by incorporating the latest products/systems in renovated units. 

The synchronization of this unit comes close on the heels of the successful re-commissioning of Muzaffarpur Units-1&2 (110 MW each), and uprating of Bhatinda Units-3&4 of PSPCL and Harduaganj Unit-7 of UPRVUNL, from 110 MW to 120 MW. Of the 218 utility sets of 110-210 MW rating supplied by BHEL in the country, about 142 have outlived their designed economic life of 25 years. Of these 142 sets, R&M of 38 sets has already been taken up by the respective utilities.

Power utilities find R&M an opportunity for capacity uprating and life extension, which not only improves their performance level in terms of improving efficiency and reducing emissions but also extends their useful life.

Recently, the Ministry of Environment & Forest (MOEF), Government of India, has stipulated stringent emission norms for the power plants installed in the country. R&M capabilities of BHEL will provide effective solutions to utilities for controlling the prescribed emission norms including SOx & NOx control.

Of the 218 utility sets of 110-210 MW rating supplied by BHEL in the country, about 142 have outlived their designed economic life of 25 years.

Of these 142 sets, renovation and modernisation of 38 sets has already been taken up by the respective utilities. Power utilities find renovation and modernisation opportunity helpful in capacity uprating and life extension.

Recently,  State-owned power equipment maker Bhel emerged as the lowest bidder for a thermal power project in Bangladesh. The $1.6-billion project will give a boost to India's energy diplomacy.

The proposed plant at Khulna will run on imported coal with capacity of 1,320 megawatt (MW), with two units to be built each of 660MW.

Industry sources said Bhel had emerged as the lowest bidder. The decision on awarding the project will be taken by the end of March. It will be the company's biggest overseas power contract.

The tender was floated by Bangladesh India Friendship Power Company, a 50:50 joint venture between NTPC and the Bangladesh Power Development Board.


Meanwhile, BHEL has commissioned a 500MW unit at Anpara-D thermal power plant in Uttar Pradesh.

During the last few years the government of India has taken steps to improve the health of the power sector by resolving the coal supply issues and bringing state governments on board to improve the financial health of state electricity boards. 

On the other hand on account of the poor state of the entire power sector, BHEL’s receivables have remained high. The company’s receivables stood at Rs.35,900 crore, more than its annual revenue of Rs.30,667.63 crore in March 2015. However, its management pointed out that about 50% of it is deferred debt which will be due for collection once certain milestones are achieved and the remainder are collectibles, of which over Rs.10,000 crore are more than a year old.

BHEL is a debt-free company and if the government’s measures of Make in India and other electricity reforms are to take off, the company is ideally positioned to capitalise on it. Though 80% of current revenue and order book is from power sector (largely generation), Bhel has taken other initiative to augment growth in future in the other segments.

Industrials which accounts for nearly 20% of the revenue and order book and caters to segment like power transmission, railways, water treatment, defence and solar is likely to see action in the near to medium future.

The government’s initiative of strengthening the state electricity boards through UDAY is likely to see order flows increasing in the transmission sector rather than generation. Bhel has significant presence in the field of power transmission in India with a wide range of transmission systems and products in its portfolio. The company is one of the leading players in transformers in the country and has started booking in big orders in the space.

In order to capitalise on the solar sector, the company is capitalising on its knowledge in the sector. Bhel manufactures space grade solar panel and space grade batteries in association with ISRO. All Indian satellites launched by ISRO are equipped with Bhel manufactured solar panels since 2002 and batteries since 2005. The company is planning to ramp up its cell & module production capacity and enhance EPC capabilities to address the domestic market demand.

In railways Bhel provides electrical propulsion system and its controls and accounts for more than 40% of electric locomotives in operation by Indian Railways. The company is augmenting its locomotive capacity and tying up with global companies to meet the increased demand from dedicated freight corridor.

Bhel is an established supplier for defence equipment. The company is working closely with various defence research institutes of the country to develop new products under the Make in India programme. It has also tied up to address the business opportunity of producing six submarines for Indian Navy.

While it is still early days for the industrial segment to provide the next leg of growth opportunity, but the Bhel is well placed to capitalise on the opportunity.

The company is available at less than its book value, with nearly half of its market capitalisation in cash as per last balance sheet. Dividend yield at current price level is still around 1.12 per cent thus giving some more room before it becomes very attractive.

BHEL is a massive company and its shares are available at dirt cheap at Rs.106.15. If India is to grow, it cannot do without Navratnas like BHEL. Therefore, buy the shares of BHEL at Rs.106.15, for a short term target of Rs.125. The first resistance however comes at Rs.106.85. It is presently trading above its 21D SMA. Keep a SL of Rs.103, for any short term play.

Source: The Business Standard, Internet and Individual Research.
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