Bharat Heavy Electricals Ltd (BHEL) is India's largest power equipment manufacturer. It has over 180 products and provides equipment to core sectors like power, transmission, and industry. While BHEL has a large order backlog, its profitability has been decreasing in recent years due to higher costs and delays in order fulfillment. However, it remains financially sound with a strong order pipeline.

1. CASE STUDY: BHARAT HEAVY ELECTRICAL Ltd.

2. INTRODUCTION BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77.

3. INTRODUCTION BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHEL 's 14 manufacturing divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18 regional offices, enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centres.

4. INTRODUCTION BHEL has Installed equipment for over 90,000 MW of power generation -- for Utilities, Captive and Industrial users. Supplied over 2,25,000 MVA transformer capacity and other equipment operating in Transmission & Distribution network up to 400 kV (AC & DC). Supplied over 25,000 Motors with Drive Control System to Powerprojects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network. Supplied over one million Valves to Power Plants and other Industries.

8. GLOBAL COMPACT

9. Established in the late 50’s, Bharat Heavy Electricals Limited (BHEL) is, today, a name to reckon with in the industrial world. It is the largest engineering and manufacturing enterprise of its kind in India and one of the leading international companies in the power field. BHEL offers over 180 products and provides systems and services to meet the needs of core sectors like: power, transmission, industry, transportation, oil & gas, non-conventional energy sources and telecommunication. A wide-spread network comprising 14 manufacturing divisions, 8 service centres, 4 power sector regional centres, 18 regional offices, besides a large number of project sites spread all over India and abroad, enables BHEL to be close to its customers and cater to their specialised needs with total solutions - efficiently and economically. An ISO 9000 certification has given the company international recognition for its commitment towards quality. With an export presence in more than 60 countries, BHEL is truly India’s industrial ambassador to the world. PRODUCT PROFILE

10. Power Thermal Boilers, STG, Auxiliaries, ESP EPC Hydro Up to 250 MW Turbines, Generators Controls Gas Adv. Class GTs Open Cycle, Combined Cycle Nu clear Nuclear Up to 1000 MWe Power Transmission Switchgear, Transformers, Insulators, Substations, SCADA, HVDC Systems Industry Captive Power Plants Boilers, STGs, Auxiliaries, C&I Systems, DG Transportation Locomotives (electric - AC/DC), Diesel-electrics, EMU's, Traction Electrics Other Products On-Shore Oil Rigs, Compressors, NCES, Desalination Plants, Valves, Motors

12. CONTRIBUTION TO INDIAN POWER SECTOR

17. OBJECTIVES SURVIVAL Existence in the market GROWTH To ensure a steady growth by enhancing the competitiveness edge of BHEL in existing business, new areas, and international operations so as to fulfill national expectations for BHEL. PROFITABILITY To provide a reasonable and adequate returns on capital employed, primarily through improvements in operational efficiency, capacity utilization and productivity, and generate adequate internal resources to finance the company’s growth. GENERAL

18. OBJECTIVES CUSTOMER FOCUS To build a high degree of customer confidence by providing increased value for his money through international standards of product quality, performance, and superior customer service PEOPLE ORIENTATION To enable each employee to achieve his potential, improve his capabilities, perceive his role and responsibilities and participate and contribute positively to the growth and success of the company. To invest in human resources continuously and be alive to their needs. TECHNOLOGY To achieve technological excellence in operations by development of indigenous technologies and efficient absorption and adaptation of imported technologies to sustain needs and priorities, and provide a competitive advantage to the company. IMAGE To fulfill the expectations which shareholders like government as owners, employees, customers, and the country at large have from BHEL. SHAREHOLDER

19. NSE n BSE - BHEL Live BSE Quotes Feb 19, 2010 (Close) Price (Rs) 2,354.00 Open (Rs) 2,368.50 High (Rs) 2,389.00 Low (Rs) 2,341.30 % Change -0.83 Volume 65,246 Value (Rs) 153,659,392 52-Week H/L 2,550.00 / 1,294.00 Live NSE Quotes Feb 19, 2010 (Close) Price (Rs) 2,351.15 Open (Rs) 2,360.00 High (Rs) 2,388.70 Low (Rs) 2,341.00 % Change -0.95 Volume 329,496 Value (Rs) 776,035,200 52-Week H/L 2,550.00 / 1,280.00

20. Recently BHEL came out with the provisional financial results for the FY09. The result was broadly in line of our expectations. The provisional numbers show a top line and bottom line growth of 28.5% YoY and 6.3% YoY respectively. The order inflow has gone up by 18.7% YoY to Rs.502.7 bn for FY09. The management has guided for ~20% top line growth and ~25% bottom line growth for FY10E on the back of strong order book position. The order inflow in FY10E is likely to remain strong at Rs.500bn. FINANCIAL ANALYSIS

21. The top line grew by 28.5% YoY against our expectation of 27.6% YoY to Rs.275.05bn. While the bottom-line was below our expectation mainly due to provision of Rs.17.28bn for the impending wage revision. The PAT grew by 6.3% YoY to Rs.30.39bn as against our expectation of Rs.33.6bn. Implied Q4FY09 gross sales grew by 32.5% YoY to Rs.105.5bn. Higher provision for impending wage revision dampened the performance for Q4FY09 (P) of the company. Bottom line witness a growth of 12.4% YoY during the quarter to Rs.12.5bn FINANCIAL ANALYSIS

22. BHEL has an order backlog is Rs1170bn at end of FY09 with an order inflow of Rs.596.8bn during FY09, a growth of 18.7% YoY. The company received orders of worth Rs.130bn in Q4FY09, decline of 5% YoY and 18% QoQ. The management is confident of obtaining orders worth ~Rs.500bn for FY10E FINANCIAL ANALYSIS

33. Business Outlook and Valuation BHEL has started FY10E on impressive order backlog of Rs.1170bn which is ~4.3x of FY09 revenue. The company witnessed impressive order inflows of Rs.596bn in FY09 and the management remains confident about the order inflow of Rs.500bn in FY10E. We believe the company would continue to perform well in FY10E and would maintain its market share at least for next 2-3 years. We also view BHEL initiative in nuclear power and super critical segment as key positives for future growth. We have introduced FY11E earnings and expect BHEL to report it to grow at a CAGR of 32% over a period of FY09E- 11E which is fairly reflected in the valuation. BHEL currently trades at 17x and 14x on FY10E and FY11E earnings respectively. We recommended the stock on 5th February 2009 post Q3FY09 results with a target price of Rs.1437 and we had mentioned the stock would be fairly valued at this price. The stock has already achieved our target price. Although we remain positive on the long term prospects of the company and considering the order book position we remain confident about its earnings growth as well, but as the stock trades at high multiple of 17x on FY10E we believe the stock is fairly valued at this price and thus we recommend a Reduce with same target price of Rs.1437. FINANCIAL ANALYSIS

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