BHEL primarily operates in two segments, namely power and industry, which includes transmission, transportation, telecommunication and renewable energy. BHEL started manufacturing power equipments way back in 1982, catering to a whole host of sectors that included transmission, transportation and oil and gas among others. Today, BHEL is a behemoth with a share of 59 per cent in the country's total installed generating capacity that produces 69 per cent of the total power generated by utility sets. The company's operations are not restricted to India alone and it has business interests in 75 countries where the cumulative overseas installed capacity of BHEL-manufactured power plants exceeds 9,000 MW.
Strengths
BHEL's biggest strength is derived from the fact that it is a profit making company from 1971-72. As on March 31, 2013, BHEL's outstanding order book stood at `31,650 crore.
The company is strong on research and development and filed for 385 patents and copyrights raising the intellectual capital of BHEL to 2,170. With the objective of becoming an innovative developer of clean, efficient, reliable and affordable products, BHEL invested `1,252 crore in R&D to further its strengths. The company is diversifying with its MoU with Indian Railways for setting up a green field coach factory for Mainline Electric Multiple Unit at Bhilwara, Rajasthan.
Moreover, the Odisha and Tamil Nadu UMPPs of 4GW are likely to further spur growth. UMPPs are money making opportunities for the sector with each UMPP having a potential business of `24,000 crore. Additionally, the boiler, turbine and generator (BTG) equipments for these UMPPs have to be sourced from domestic manufacturers. BHEL being one of the biggest players in the sector has a good chance of winning at least one of these two UMPPs.
Concerns
Order inflow is a worry, which plagues the whole sector. Moreover, coal shortage is still an excruciating issue for power plants with Coal India not improving despatches fast enough. Even the private sector that accounted for 50 per cent of capacity addition during the last three years has completely vanished. Other constraints involving land acquisitions, environment clearances, highly leveraged balance sheets of some of the biggest players of corporate India have led to cancellation or delays in new projects.
Intense competition from Korean and Chinese players in the capital goods and power plant equipment space is a new concern, which is a shift from erstwhile competition from ABB and Siemens, among others. With the Indian government agreeing to allow Chinese power sector players to open service centres in the country, the worst of BHEL's fears are coming true with aggressive competitors on both pricing and service. Further, the investment capex cycle of BHEL's key client sectors - cement, steel, refineries etc. - continue to be weak and could remain in the dumps for some time to come.
Valuation
The last couple of months witnessed renewed interest in capital goods players at the bourses with BHEL gaining more than 50 per cent since August 2013. However, it is still down 32 per cent in calendar year 2013. The stock trades at 7.6 times its earnings-far from its 10-year median of 23.72x. But this low valuation may not signify value yet.
BHEL could see further margin erosion as the company executes low margin orders taken in FY11-12 but which are still lying unfinished. With the investment cycle showing no signs of turning around and the recent run up in the stock price, stay away from BHEL until such times as and when the order intake and execution both start improving. For now, avoid.
This article was originally published on February 14, 2014.
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