STOCK UPDATE

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,616
Current market price: Rs2,478

Exploring new business opportunities

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  Bharat Heavy Electricals Ltd (BHEL) has recently floated an expression of interest (EOI) to appoint a consultant to work on ideas to use its cash reserves and to explore the possibility of the formation of a separate finance company in joint venture (JV) with a strategic partner to finance power projects. As per the EOI, subsequently the proposed non-banking finance company (NBFC) could also target the opportunities in the overseas markets, particularly in the countries where BHEL has a sizeable presence. This NBFC venture could also play a major role in facilitating orders from customers requiring equipment as well as financing and necessary financial advisory services.
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  We remain positive on BHEL in view of the many positive developments expected in the current year?a possible win in the National Thermal Power Corporation?s bulk tendering, and the other supercritical power projects, increased momentum in the transmission and distribution (T&D) space etc. Nonetheless, of late, amid the rising competition in the power equipment sector and the growing opportunities in spaces like power T&D, BHEL has aggressively started looking to diversify its business profile and geographies. We maintain our estimates. At the current market price the stock is trading at a price to earnings multiple of 19.3x and enterprise value/earnings before interest, depreciation, tax and amortisation of 12.4x on our FY2011 estimate. We maintain our Hold call on the stock.