Bharat Heavy Electricals Limited – Riding on strong power wave

 Innovation and successful adaptation of various technologies have given this company a muscle to stand in export front.

The Company

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.

        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 centers, over 100 project sites, eight service centers 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 centers. Currently the company employs more than 47000 and the business is divided in 3 segments namely Power, Industry and Exports. Industry segment includes various sub-segments such as Transmission, Transportation, and Telecommunication & Renewable Energy. Segments 

Power

Power is the main business accounting for more than 70% of the company’s revenues. The company makes equipment for all types of power plants i.e. thermal (coal/gas), hydel & nuclear. It has installed equipment for over 90,000 MW of power generation - for Utilities, Captive and Industrial users. Its sets account for nearly 65% of the total installed capacity in the country.

Industry

In Industry segment BHEL manufactures major capital equipment and systems like captive power plants, industrial boilers, gas turbines, pumps, heat exchangers, electric machines, valves, and forgings etc. to a number of industries other than power utilities like metallurgical, mining, cement, paper, fertilizers, refineries & petro-chemicals etc. It also manufactures a wide range of transmission products and systems, transportation and telecom equipment. It has developed and commercialized technologies for exploiting non-conventional and renewable sources of energy. BHEL has emerged as a major manufacturer of wind electric generators up to 250 KW unit size.

Exports

BHEL has exported its products and services to more than 60 countries. Its exports range from individual products to complete power stations on turnkey basis, and specialized after-market-services like Residual Life Assessment (RLA) studies / Retrofitting /  Refurbishing/ Overhauling. They also include supply of HV/EHV Substations.

Research and Development

        BHEL has been successful in absorbing various technologies from several international players. It has also adapted them to suit the Indian conditions, such as have to its credit several successful adaptations of global technology to suit Indian modification of boiler design to function optimally with Indian coal known for high ash content. It has also developed dedicated small and medium industries to source various components required for its production. 

Power

The Ministry of Power has targeted to increase the installed capacity by 100,000MW in the 10th and 11^th five year plans, giving the sector a major thrust. A capacity of nearly 41,000 MW would be set up in the 10th plan which would call for an investment of about Rs2,000bn on generation and transmission and the remaining in the 11th plan. The central sector would contribute 22,500MW, state sector 11400MW and private sector 7,100MW. Projects of 19,000MW are already under construction and projects of 8,990MW have the requisite approvals.

Rural electrification

Under this scheme it is proposed to electrify 62,000 villages through grid connectivity during the 10th plan. The balance 18,000 villages are to be electrified through the use of non conventional technologies. This scheme will also entail an investment of about Rs1,600bn.

Power reforms

To turnaround the financial health of the power sector and to reduce transmission and distribution losses the Government has taken up reforms in this sector by introducing the Accelerated Power Development and Reform Program (APDRP) and the Electricity Act, 2003. These reforms will trigger an increased momentum and opportunities in the power transmission and Distribution (T&D) segments as well as investments in power generation. Further many states have signed the tri-partite agreements with Central Government and the Reserve Bank of India (RBI) towards settlement of dues owned by the SEBs to the central utilities which would drive thereforms process and have a long term beneficial impact on the power sector.

The Electricity Act, 2003

        The Electricity Act, 2003 seeks to bring about a qualitative transformation of this sector. The salient features of this Act are delicensing, freely permitting captive generation, facilitating open access to transmission and distribution (in phased out manner), encouraging power trading, metering of all electricity, providing for stringent theft penalties, constitution of Central Electricity Authority, Regulatory Commissions and establishment of Appellate Tribunal. It focuses on promoting competition, protecting consumer interests, rationalization of electricity tariffs, ensuring transparent policies regarding subsidies and ensuring supply of electricity to all areas. The Act would provide an opening to private players in this sector. There will be an increase in the generation capacity, also the project cycles would be shortened due to elimination of licenses and there would be timely realization of dues. 

Industry

        The growth experienced by the Industrial sector has been steady ranging more than 8-10% in the last 5 years. Further there has been steady growth the power intensive home appliances as well growing population adopting internet culture. India is the largest growing market for a number of consumer services like telecommunication, entertainment which are also underpinning the power demand. The power production is likely to grow by nearly 8% in the coming years. The recent success in the Reliance Power issue is a big boost to private sector investments in the power generation projects. 

Past Financials

 The company's past financials are tabulated here below:

         The company’s revenue has been growing at more than 25% per year in the past 5 year period. The operating profit has shown a very good growth of over 45% in the last three years. The interest costs are declining while the depreciation has gone up at a reasonable 10%. The company has a very good value investing within. The growth in earnings per share at over 45% is a very good pointer. The virtual monopoly status for long years in power equipment and the good increase in power sector investment have all made this possible. The only area of concern is the increased employee cost in FY 07 which is likely to continue in the current year and year next as the salary increases are bound to have their impact on the operating profit unless the company is able to negotiate a revision in the long terms contracts with the SEBs.

Quarterly results

             Bharat Heavy Electricals (BHEL) disclosed a steady jump in net profit for the quarter ended December 2007. During the quarter, the company experienced a 15.61% rise in profit to Rs 7,719 million from Rs 6,676.50 million in the quarter ended December 2006. Net sales for the quarter rose 14.38% to Rs 49,641.40 million, compared with Rs 43,396.90 million in the corresponding quarter, a year ago. Total income rose 15.55% to Rs 52,290 million for the quarter ended December 2007 from Rs 45,251.60 million for the same period, last year. The basic Earnings Per Share, after extraordinary items, stood at Rs 15.77 for the quarter ended December 2007. 

• Pursuant to the issued of bonus shares in the ratio of 1:1 the paid up share capital of the company stands increased to Rs 4,895.20 million.
• The company has an outstanding order book position of about Rs 780 Billion at the end of quarter three.
• Bharat Heavy Electricals bagged USD 190 million, or Rs 7.65 billion order, from SAIL.
• The company won Rs 3,940 million contract from Rashtriya Ispat Nigam (RINL) for the expansion project of its Vizag steel plant in Andhra Pradesh.
• Bharat Heavy Electricals signed a MoU with the Tamil Nadu Electricity board to form a joint venture to establish two 800 megawatt supercritical thermal power projects in the state.
• BHEL inked a joint venture agreement with NTPC on Dec. 17, 2007 for establishment and operation of joint venture company for taking up engineering, procurement & construction  (EPC) business.
• The board of directors of Bharat Heavy Electricals (BHEL) at its meeting held on Jan. 25, 2008, declared and approved payment of interim dividend at 90% i.e., Rs 9 a share for the financial year 2007-08.

My Views

         This is a very good share with strong fundamentals and good performance is likely to reflect in its share prices.  The investor can consider buying this share and definitely review and add on if the prices touch its support around Rs. 2000.