>BHEL (JAYPEE CAPITAL)

STILL GROUND FOR FURTHER GROWTH

■ FY 08‐09 ‐ Key Highlights – Performance beats expectation
The FY09 results were better than our expectations, as net sales grew by 37% and PAT grew by 9%. Raw material cost increased to 65% on net sales due to usage of ferrous and non ferrous metals at higher costs. Employee cost has increased by 32% yoy, due to implementation of the Sixth Pay Commission Wage Act, where we can see some respite in the years ahead on account of lower wage cost. As a result total expenditure as a percentage of net sales has increased from 83% to 86%. Operating profits have reduced from 27% to 17% as a result. As a result PAT margins have reduced from 15 to 12%.

■ Q4 FY 08‐09 ‐ Key Highlights – Future more promising
For the Q4 FY09, net sales grew by 46% and PAT grew by 21%. Raw material cost increased to 66% from 58%. Employee cost as a percentage of net sales has reduced from 16 to 13%. As a result total expenditure as a percentage of net sales has increased from 81% to 84%. Operating profits have reduced from 25% to 19% as a result. Due to higher raw material cost, PAT margins have reduced from 15 to 13%.

■ Order Book
FY09 has ended the year with an order backlog of Rs. 1170 bln, indicating a book to bill ratio of 4.1x. The order inflow for FY09 has been 596 blns out of which power comprises 74%, industry 17% and rest is international. The order inflow for the next two years seem to be muted according to the management at Rs. 500 billion. Order booking for the 12th five year plan for 100000 MW will soon be taking place in the near future.

■ Recent Orders
BHEL has won a Rs.7,030 Million Contract for for the main plant package at the upcoming Bela Thermal Power Project (TPP) in Maharashtra, involving one new‐rating unit of 270 MW. The order has been placed by Ideal Energy Projects Limited (IEPL) reflecting the customer’s confidence in the company’s technological excellence and project execution capabilities. An order for a 600 MW thermal power plant has been placed by Korba West Power Company Limited in Chhattisgarh, an Independent Power Producer. It reinforces BHEL’s leadership status in the execution of thermal power projects involving supply of state‐of‐threatt equipment, suited to Indian coal and Indian conditions.

■ Wage provision
Sharp erosion in margins can be attributed to higher provisioning towards pending wage settlement liabilities and higher material cost. Pay revision of employees of the company is due with effect from Jan 1, 2007. Pending finalization of wage settlement the company is providing for the expected liability and for the period from Jan 1, 2007 to March 31, 2009 it has provided a sum of Rs 2547 crore. Out of the Rs 2547 crore the company has provided about Rs 1729 crore in fiscal ended March 2009 with balance being done in FY08. With the company having provided about Rs 839 crore upto Dec 2008 out of the total Rs 1729 crore for the fiscal ended March 2009, it has provided about Rs 890 crore in the fourth quarter ended March 2009 there by affecting the operating margin of the company. In fact the company's total provision for the fiscal at Rs 1729 crore is higher than the earlier expected Rs 1313 crore and this is largely on account of increased liability on account of change in gratuity plan and higher dearness allowance.

■ Power Industry
India’s power generation capacity has gone up by about 3,500 MW in fiscal 2009, but the capacity addition was dismal as it was over 68% below the target of 11,061 MW set for the period. Power generation is, however, expected to grow by 4.6% this fiscal as projects with a capacity of 7,730 MW are likely to commence generation in FY10, Centre for Monitoring Indian Economy (CMIE) said. The total installed power generation capacity in India rose by 3,453.7 MW during April‐March 2008‐09. This is 68.8% below the capacity addition target for 11,061 MW set for the period.

■ Going Ahead ….
The backlog at end‐Mar ’09 (of Rs 1170 blns) was 37% higher yoy. Orders worth Rs 500 bln are expected in FY10, acc to the management. Bulk orders from National Thermal Power Corporation (NTPC) and Damodar Valley Corporation (DVC) are expected to be placed in Q2FY10 according to management. BHEL can get upto 6 orders if L1 and if not upto atleast 5 orders are expected.

Benefit of lower steel prices will come into effect from Q2FY10 onwards. Positive impact due to reduction in raw material cost by 2% will accrue to the bottomline. As the manufacturing capacity will double from 10000 MW to 20000 MW by 2011‐2012, the execution percentage will increase from 29% in FY10 to 30% in FY11.

To see full report: BHEL

To see full report: BHEL

>CROMPTON GREAVES (JAYPEE CAPITAL)

We initiate coverage on Crompton Greaves with a ‘BUY’ recommendation and a target price of
INR 320 per share implying an upside of 22% from current levels. We expect Crompton Greaves
to maintain its leadership position in transformers space with robust spending planned in power
generation over 11th and 12th five year plans resulting in robust demand for power equipments.
We believe the increasing synergies arising from the international acquisitions and technological
prowess in high end power T&D products would create significant value going forward.

■ Power infrastructure to witness heavy investments
The peak power deficit, at 16.6%, is at a multi year high. With demand for power expected to grow at 8 to 10% annually, power supply will face even greater strain. In order to meet the shortfall, heavy investments are planned in increasing the installed capacity of power generation. Huge investments will also be made in increasing inter regional transmission capacity to facilitate transfer of power across the regions. With an investment of INR 1,400 bn ministry of power plans to increase the capacity of integrated national power grid from 17,000 MW to 37,000 MW by 2012.

■ Strongly placed to tap power growth
Every 1 MW of power generation capacity requires 7 MVA of new transformer capacity addition. Ministry of power plans to increase installed power generation capacity from 147.7 GW to 200 GW which would result in huge demand for transformers. With the installed capacity of 27,000 MVA Crompton Greaves is the largest manufacturer of transformers in India. With the product synergies and technological advancement arising through international acquisitions it is now one of the very few companies having experience in execution of high end power equipment products in which incremental investment will come going forward.

■ Avantha acquisition a downer
Crompton Greaves recently purchased 41% stake in group company Avantha Power and
Infrastructure Ltd (APIL) for INR 2.27 bn. The entire investment will be towards the equity infusion in APIL’s 600 MW Korba power project. We believe that such non – core investment was made in order to enable the Korba project to reach financial closure as banks disburse funds in proportion to equity contribution. Although the cash outflow is sentimentally negative and could have been utilized for more strategic business purposes it is not likely to have a negative impact on the financials of Crompton Greaves in the long term.

■ Steep discount to peers unwarranted, BUY with a price target of INR 320
Crompton Greaves has historically traded at a discount to its peers which we believe should narrow down considerably going forward. It did not get the same valuations as its peers due to the fact that it was not as techhmmmnologically superior, had gaps in its product portfolio, lack of presence in high end range of power equipments products and lack of proven track record world wide. But it has addressed these issues considerably through successfully integrating its international acquisitions. Although we still believe that the relative premium of companies like ABB and Siemens will continue going forward primarily due to its strong parentage, the extent of discount shall reduce considerably. We assign a p/e multiple of 16 times FY11E estimated EPS of INR 20 to arrive at a target price of INR 320 per share implying an upside of 22% from current levels.

To see full report: CROMPTON GREAVES

>BHEL (Japyee Capital)

● Strong Order Backlog: With an impending order backlog of Rs. 1135 and expected to close the fiscal year FY09E at Rs. 1200 , clear revenue visibility can be seen for the next 4‐5 years timeframe. High orders from NTPC & other government entities reduce the risk of order cancellations in this economic downturn. With a reigning market share of 60‐70% in the power equipment arena, Bhel will witness strong order inflows with the 12th five year plan in the offing.

● Power to ALL by 2017: With an average GDP growth rate of 7‐8% for the next 10 years, India’s insatiable demand for power which is c120 GW is expected to soar to 315‐335 GW by 2017. India will require generation capacity of 415‐440 GW, which implies a tripling of installed capacity from c140GW translating into an annual addition of 20‐40 GW. This implies fivefold to tenfold the 4 GW per year that was achieved in the last 10 years. This will drive growth in equipment manufacturing.

● Supercritical boilers to be the mainstay of future: Almost 50% of the 12th 5 year plan will have projects based on supercritical technology. A major stimulus for bulk order for supercritical power equipment worth an estimated Rs 21,000 crore is likely to be thrown open for bidding in FY10 to the domestic power equipment sector. Nine units from NTPC and two units for Damodar Valley Corporation of 660 Mw each have been ordered. Chinese equipment manufacturers with no domestic manufacturing facilities in the country have been barred from bidding raising concerns regarding the quality and efficacy of Chinese equipment in harsher Indian conditions, where high‐ash coal is used.

● De‐bottlenecking & lining up additional capacities: Plans are afoot to augment capacities to 15,000 MW from c10000 MW per annum by December, 2009 with an investment of Rs 42000 mlns and to 20,000 MW per annum by December 2011 with an investment of Rs.48000 mlns, via internal accruals. This will iron out capacity constraints on the company and fasten its execution capacities that should augur well for organic expansion in power sector.

To see full report: BHEL