Bharat Heavy Electricals
BHEL operates in three business sectors--power, industry, and overseas. The company 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.
Given the need to build huge capacities in the power sector, BHEL being the largest power equipment manufacturer in India, is the major beneficiary. The company’s order book stands at Rs 78,000 crore.
BHEL has completed first phase of expansion; it has increased its capacity by 10,000MW by December 2007. In the second phase, the company targets 15,000MW which will be completed by December 2008.
Eleventh five year plan has envisaged power capacity additions of 78,000MW of which tenders for 50,000MW have already been floated. The balance 28,000MW is in process and the government is likely to issue orders over next 12 months.
In December 2007, BHEL has acquired government owned sick company Bharat Heavy Plates & Vessels. BHEL plans to invest Rs 275 crore as capital expenditure apart from investing Rs 34 crore as equity in the company.
BHPVL will add to the capacity of industry boilers division of BHEL. BHEL can also benefit in terms of tax breaks on accumulated losses of BHPVL.
BHEL has recorded a topline growth 14.4 per cent in October-December 2007-08 and earnings growth of 15.6 per cent. The EBITDA margin eroded by 132 basis points due to higher staff costs.
BHEL’s topline grew at a CAGR of 25.5 per cent during FY03-07. Considering the huge demand for power sector in India and the huge capacity build up in the eleventh plan period, Keynote believes BHEL will continue on a similar growth trajectory.
As per consensus estimates the topline is expected to grow at a CAGR of 28.7 per cent over FY07-09. The stock trades at 27.2x FY08E and 19.1x FY09E earnings.
Larsen and Toubro
L&T is an engineering and construction major in India. Engineering and construction business is the largest revenue earner, with a share of 68 per cent of 2006-07 in the consolidated revenues.
Given its track record and size, L&T is well poised to capitalise on the increasing infrastructure activities in India as well as globally (mainly gulf region).
The company currently has an order book of Rs 49,575 crore, up 39 per cent over previous quarter. The total order inflow was Rs 13,019 crore during this quarter. Exports contribute 13 per cent of total order book.
After a low of 8.7 per cent in 2004-05, L&T’s EBITDA margins improved substantially in the last two years, to reach 13.4 per cent in 2006-07. Going forward, the company expects only a limited margin expansion on account of the higher contribution of the E&C division in the revenue mix.
On the positive side, the company enjoys a strong pricing power due to robust demand. Also, its emphasis on increasing the manufacturing content in its projects can help improve margins.
L&T is also into building small sized ships (1000DWTs) at Hazira. It plans to start production of large sized ships (150,000DWTs to 350,000DWTs). Estimated capital expenditure of Rs 2,000-2,500 crore, with margins of 15 per cent. The company will likely to build hi-tech ships like LNG carriers.
The company is also likely to unlock value by listing its subsidiaries L&T Infotech (tentatively post September 2008), L&T Finance in 2010, L&T IDPL in 2011.
The company expects a revenue growth 25-30 per cent in 2007-08 backed by strong order inflow. The company expects growth in order inflows in the range of 25-30 per cent.
The stock trades at 35.9x FY08E and 26.3x FY09E earnings.
National Thermal Power Corporation
NTPC is India’s largest and most efficient power utility, with an average plant load factor of 89 per cent. The company generates power from thermal resources (coal and gas). Thermal power accounted for around 82 per cent of 2006-07 revenues.
In FY07, NTPC added capacity of 3155MW. It plans to aggressively increase its power generating capacity over the next five years, from 27,904MW to 50,004MW and 75000MW by 2017. Plant orders for 13360MW have already been placed while orders for 9000MW plants will be placed throughout the year.
It is also diversifying from its core area of thermal power generation to power generation from other resources like hydro, nuclear and non-conventional renewable resources. The company expects the share of thermal power in its installed capacity to decline from 82 per cent in FY07 to 66 per cent in FY17. The strategic diversification in phased manner will improve EBITDA margins, going forward.
Besides power generation, NTPC is also foraying into power distribution, as it plans to have 1000MW capacity by FY12. The company also expects its trading volumes to increase more than 4-fold from 2.66 billion units to 10 billion units by FY12.
It plans to improve its sourcing capability of raw materials, as it intends to bid for coal mines which will have capacity of 15mn tpa by FY12 and 47mn tpa by FY17.
Only recently, the company has acquired TELK from Kerala government to manufacture, market and service transformers.
In Keynote’s view, a positive investment scenario in the power sector has been building up, NTPC, with its good track record would be a good investment opportunity. With its aggressive expansion plans, diversification in terms of power generation from thermal to other alternative energy sources would likely improve margins.
While its diversification into the transformer businesses will improve the returns to shareholders (As per regulations the utilities have 14 per cent cap on their ROE, but due to the diversification to transformer segment would help increase ROE)
The stock trades at 20.7x FY08E and 19.0x FY09E earnings.
Reliance Energy
The company currently distributes 28 billion units of electricity to cover 25 million customers in an area spanning over 124,300 sq. kms.
Given the backdrop of the huge power shortage (peak power deficit of around 14 per cent) in India, Keynote expects significant activities in the sector over the next decade and has a positive view on the sector.
REL is planning to expand its generation capacity from current 1,000MW to 15,000MW over the next 4-5 years (an investment of Rs 60,600 crore). Considering the track record of the Reliance ADA group, Keynote believes this exponential increase in capacities will create substantial value for investors.
The company’s EPC business saw a strong growth in 2006-07. REL has entered in an agreement with Shanghai Electric Power for equipment supply. This agreement provides a cost advantage to the company as SEPCO’s equipment costs are 10-15 per cent cheaper than that of Indian component suppliers.
REL has already secured Sasan project (Ultra mega power project) following the disqualification of Lanco Infratech.
REL has 44.96 per cent stake in recently listed Reliance Power. Reliance Power plans to generate 27000MW power by 2017. The company has a market cap of Rs 72,800 crore.
Recently, the company has announced a buy-back of five million shares for Rs 800 crore (Rs1600 per share).
Keynote believes the high governmental interference in the sector, availability of fuel, and slow pace of reforms are the major concerns. At the company level, besides these concerns, timely execution is critical.
The stock trades at 29.6x FY08E and 25.2x FY09E earnings.
Tata Power
It has a presence in all the segments of the power sector, viz. generation (thermal, hydro, solar and wind), transmission and distribution. In 2006-07 the company won the bid for the first 4000MW Ultra mega power project at Mundra (Gujarat) and has successful public-private partnerships in generation, transmission and distribution - North Delhi Power with Delhi Vidyut Board for distribution in North Delhi, Powerlinks Transmission with Power Grid Corporation of India for evacuation of Power from Tala hydro project in Bhutan to Delhi and Maithon Power with Damodar Valley Corporation for a 1050 MW mega power project.
Indian power sector is facing a shortage of 14,000MW at peak hours. 11th plan has envisaged a power capacity addition of 132,000MW by 2012. Even if the targeted capacity addition is achieved, India is likely to face a shortage of 30,000MW due to strong economic growth.
TPCL is India's largest power utility in private sector with strong capability of executing large projects. Keynote believes the company's aggressive forays into mega power projects, strategies such as diversifying Maharashtra power projects, intentions to enter into nuclear power projects and hydel projects will help improve the revenue streams over a period of time. The brokerage is also positive about the company's track record of nearly nine decades in India.
TPCL has plans to expand the generating capacity from 2,300MW to 10,000MW by 2012. The capital expenditure planned in respect of the same is Rs 10,000 crore over next three years, of which Rs 2600 crore will be during 2007-08.
In 2006-07, the company won the bid for 4,000MW Mundra Ultra Mega power project at a levelised tariff of Rs 2.26 per unit. The cost of project is expected to Rs 17,000 crore, which it will finance through a debt to equity mix of 80:20.
For sourcing coal for the project, TPCL has recently acquired a 30 per cent stake in Indonesian thermal coal companies owned by PT Bumi Resources. It has signed an off-take agreement which entitles it to purchase 10 million tonnes coal per annum for an initial period upto 2021, which is extendable thereafter.
Maithon Power (a TPCL: Damodar Valley Corporation joint venture in proportion of 74:26) would likely achieve financial closure in the current year while production will commence during 2011.
Its Trombay plant of 250MW will be commissioned by second half of 2008 as per schedule. 78 per cent of 2006-07 revenues consist of revenues from Maharashtra and surrounding areas. Going forward, since most of the new capacities are coming outside Maharashtra, Keynote believes the revenue share of other parts of the country will improve.
The stock trades at 28.5x FY08E and 25.0x FY09E earnings.
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