Investments Project

Post-Graduate Program in Software Enterprise Management

Indian Institute of Management, Bangalore

Investments – Q1 2009-10

Prof. M.S. Narasimhan

Group Project Submission

Analysis and Valuation for
Bharat Heavy Electricals Ltd.

Submitted by Group – 15

Amit Bhalotia 2008007

Dharmesh Dipak Gandhi 2008019

Swapna Acharla 2007064

Investments Group Project Group 15

Table of Contents

Industry Analysis .....................................................................................................................................3
OVERVIEW OF INDIAN CAPITAL GOODS INDUSTRY............................................................................3
PAST & FUTURE PERFORMANCE OF THE INDUSTRY...........................................................................3
INDUSTRY ANALYSIS........................................................................................................................3
INDUSTRY – KEY RATIO ANALYSIS...................................................................................................3
INDUSTRY – COMPARITIVE ANALYSIS .............................................................................................4
Outlook ...............................................................................................................................................5
Competitiveness Analysis of Indian Capital Goods sector ..............................................................5
Business Environment Competitiveness Issues ..................................................................................6
TRADE POLICY ISSUES .....................................................................................................................6
EXPORT PROMOTION POLICY ISSUES .............................................................................................7
INDUSTRIAL STRUCTURE ISSUES.....................................................................................................7
Conclusion from Industry Analysis......................................................................................................8
Company Analysis .................................................................................................................................11
Products & Services ..........................................................................................................................11
Financials...........................................................................................................................................12
Valuation...........................................................................................................................................13
Technical Analysis .................................................................................................................................18
Momentum Indicators ......................................................................................................................19
Conclusions from Technical Analysis ................................................................................................20
Derivatives ............................................................................................................................................21
Futures Analysis ................................................................................................................................21
Options Analysis................................................................................................................................22
Time Variation...............................................................................................................................26
Conclusions .............................................................................................. Error! Bookmark not defined.
References ............................................................................................................................................28

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Industry Analysis
OVERVIEW OF INDIAN CAPITAL GOODS INDUSTRY

PAST & FUTURE PERFORMANCE OF THE INDUSTRY

For the purpose of this study, BHEL has been classified under the Capital goods industry (defined as
product / equipment of high value, durable economic asset life > 3 years, used as plant and
machinery for agricultural, industrial and commercial purpose in production / service delivery
process).

INDUSTRY ANALYSIS
Capital goods industry despite sitting on healthy order book undergoes the strains of economic
slowdown with lower pace of order execution as well as lower order inflow especially in
manufacturing and private sector infrastructure investment. While the lower pace of order
execution was pinching the revenue booking of the industry the lower order flow escalates the
competition and pressure on margin. On the background the performance of capital goods sector
players has been mixed for the quarter ended Jun 2009.

The aggregate of other 25 companies forming part of BSE Capital Goods (CG) Index recorded decent
12% rise in revenues to Rs 26866 crore. The operating margin has been flat at 11.5% thus facilitating
12% growth in operating profit to Rs 3088 crore. The growth in PBT was moderated to 6% at Rs 2927
crore. The taxation was lower by 14% to Rs 800 crore, which facilitated relatively better 18% rise in
net profit to Rs 2127 crore. The aggregates were powered by powerful show by handful of players
led by industry heavy weights of Larsen & Toubro, BHEL and Crompton Greaves.

INDUSTRY – KEY RATIO ANALYSIS
INDUSTRY AVERAGES 2009 2006 2005 2004 2003 2002 2001 2000 1999
No. of Companies 17 8 9 11 14 11 13 13 9
Key Ratios
Debt-Equity Ratio 0.18 0.17 0.19 0.22 0.26 0.35 0.39 0.34 0.35
Long Term Debt-Equity Ratio 0.17 0.15 0.16 0.18 0.21 0.2 0.2 0.21 0.23
Current Ratio 1.53 1.52 1.53 1.58 1.61 1.5 1.39 1.37 1.37
Turnover Ratios
Fixed Assets 3.94 3.85 2.98 2.62 2.45 2.41 2.24 2.48 2.72
Inventory 5.48 5.28 5.1 5.02 4.59 4.23 3.76 4.07 4.15
Debtors 2.7 2.62 2.37 2.4 2.15 1.97 1.84 2.08 2.33
Interest Cover Ratio 19.94 23.77 13.98 10.55 7.39 5.48 2.26 4.14 5.88
PBIDTM (%) 16.93 17.24 15.53 14.46 13.99 13.51 8.11 12.56 14.29
PBITM (%) 15.3 15.62 13.5 12.23 11.55 11.18 5.39 10.02 12.05
PBDTM (%) 16.17 16.58 14.56 13.3 12.43 11.47 5.73 10.14 12.24
CPM (%) 11.32 11.56 9.91 9.17 8.12 8.62 5.66 7.22 8.1
APATM (%) 9.69 9.94 7.88 6.95 5.68 6.28 2.94 4.68 5.87
ROCE (%) 34.68 34.87 25.72 21.49 19.15 17.93 8.26 18.08 23.74

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RONW (%) 25.99 25.86 17.82 14.69 11.38 12.87 5.93 10.95 15.47
Source: Capitaline

INDUSTRY – COMPARITIVE ANALYSIS
LARSEN & CROMPTON THERMAX
FY09 BHEL
TOURBO GREEVES LTD

s Mar ' 09 Mar ' 09 Mar ' 09 Mar ' 09
Adjusted EPS (Rs) 45.05 59.59 13.93 32.13
Dividend per share 10.5 15.25 2 5
Operating profit per share (Rs) 70.72 75.75 20.6 41.39
Net operating income per share (Rs) 578.06 399.18 127.64 259.79
Profitability ratios
Operating margin (%) 12.23 18.97 16.14 15.93
Gross profit margin (%) 11.39 17.65 15.17 14.89
Net profit margin (%) 10.06 13.87 8.4 9.09
Adjusted cash margin (%) 8.5 15.41 11.76 13.13
Adjusted return on net worth (%) 21.21 27.07 41.6 39.79
Leverage ratios
Long term debt / Equity 0.43 0.01 0.04 -
Total debt/equity 0.52 0.01 0.04 -
Owners fund as % of total source 65.47 99.12 95.81 100
Fixed assets turnover ratio 6.23 4.48 4.25 5.29
Liquidity ratios
Current ratio 1.3 1.38 1.32 1.23
Quick ratio 0.96 1.09 1.13 1.01
Inventory turnover ratio 6.01 3.88 17.88 12.2
Payout ratios
Dividend payout ratio (net profit) 20.58 30.54 21.59 24.26
Coverage ratios
Adjusted cash flow time total debt 2.23 0.02 0.09 -
Financial charges coverage ratio 6.35 134.86 28.07 55.04
Component ratios
Material cost component (% earnings) 27.51 53.22 66.28 68.29
Selling cost Component 0.92 1.12 4.7 2.86
Exports as percent of total sales 21.7 4.8 24.77 20.82
Import comp. in raw mat. consumed 44.34 27.73 15.74 16.49
Long term assets / total Assets 0.35 0.04 0.26 0.28
Source: Rediff.com

The Transmission and Distribution equipment industry especially transformers that has seen
aggressive capacity expansion by players resulted in increased supply leading to heightening of
competition in the market place. Moreover the competition from Korean and other overseas players
has increased with global slowdown on international competitive bidding tenders. This increased
competition has resulted in sharp fall in prices of products/ projects affecting T&D equipment
manufacturers as well as T&D turnkey project service players.

China’s power equipment manufacturers, leveraging their lower
costs and shorter delivery periods, have begun hitting Indian
majors like BHEL where it hurts most—and are walking away with
orders worth thousands of crores of rupees. India plans to add
90,000 MW during the 11th Five- Year Plan ending March 31,
2012. According to one estimate, by McKinsey & Co., India needs

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315- 335 GW (1 GW=1,000 MW) by 2017 if it has to grow at 8 per cent over the next 10 years. In this
background, the market for power equipment has become very lucrative and there’s a lot of action
taking place. While Chinese companies have bagged contracts for an estimated 18,000-20,000 MW
of equipment to be supplied over the next 8- 10 years, BHEL’s market share actually fell by a little
over a percentage point to 63.68 per cent in 2007-08. Few complain about the quality of BHEL’s
equipment. But its delivery record is the culprit. The PSU power equipment major is sitting on orders
worth Rs 85,500 crore, but is plagued by tardy implementation that is holding back incremental
capacity addition. Today, its production lines are stretched and it often ends up paying huge
penalties for delays, while the Chinese companies invariably deliver on time.

There is, thus, a yawning gap between the demand and supply of
electricity generating equipment, and given current trends, this is likely
to grow as many more power projects are conceived of and
implemented, both in the public and private sectors. Not surprisingly,
foreign power equipment suppliers, like ABB (Sweden), Ansaldo (Italy),
Doosan (South Korea), Hitachi and Toshiba (Japan) and Power
Machines (Russia), are staking out the Indian market. The ground
reality is that BHEL, which is struggling with capacity constraints— a
function of flawed planning— is hard put to maintain its existing
market share of about 65 per cent. It has already lost several large
contracts, most notably the Tata promoted ultra mega power projects
(UMPP) at Mundra to Japanese rival Toshiba Corporation. A number of
private power projects may switch to Chinese suppliers, because their equipment is a lot cheaper;
and, more importantly, they deliver in about 30 months.

Outlook

Capital goods sector is the major sufferer of slowdown in private investment on the back of
economic slowdown. Now with improvement in macroeconomic indicators there are signs of
positives in most of the key sectors although certain industrial segments continue to face stiff
challenges in driving demand. With crude oil prices showing signs of stability/ hardening, renewed
interest is expected in oil exploration and production not only in the country but also in Gulf there by
giving push for renewal of infrastructure building activity in that
region. Indian capital goods sector having greater interest in
building infrastructure of Middle East countries are expected to
gain if that happens.

A new stable government in place also lend confidence among
private players to invest especially in infrastructure development
such as roads, and power. Though short-term outlook is cloudy the
long-term outlook for the sector is good with renewal of private
investment to back up the public sector spending in the country as
well as infrastructure build up in overseas markets

Competitiveness Analysis of Indian Capital Goods sector

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The study of the performance of the Capital Goods sector reveals that its fortunes are inextricably
linked with that of the overall Indian industry. High degree of correlation between the performances
of the two sectors is further accentuated by high elasticity of Capital Goods industry to changes in
industry growth. The Capital Goods value added contributes a fairly constant proportion (9-12%) of
the total manufacturing value added, thus establishing that manufacturing as the key end-user
sector of Capital Goods drives the performance of the latter. Another key determinant of the
demand for Capital Goods is the gross investment undertaken in the economy. The apparent
consumption of Capital Goods constitutes a constant share (17-21 %) of the total Gross Domestic
Investment in the country. On the supply side the output of Capital Goods is determined by
investments in Capital Goods sector and capacity utilization. The investments in the Capital Goods
sector have declined with the decline in the relative profitability of the Capital Goods sector with
respect to other sectors. The export performance corroborates the inward focus of Capital Goods
industry as less than one-tenth of its sales is directed to exports.

Business Environment Competitiveness Issues

TRADE POLICY ISSUES
The raw materials used are largely domestic in origin. With the dismantling of various price
controls on key inputs, Indian Capital Goods manufacturers now procure raw materials at
market prices, which move in line with international prices. The raw material price indices
have risen faster than the machinery price index. It is difficult for the Indian Capital Goods
manufacturers to pass on the rise in prices to the customers, thereby impacting their
profitability. However the rising cost of raw materials has prodded only a few Indian
manufacturers to resort to value engineering techniques for efficient raw material usage and
cost reduction. The quality of raw materials is also not up to the international standards in
terms of dimensional tolerances and metallurgical properties, and this, in turn, affects the
quality of the final product.
There is comparatively high incidence of indirect taxation (excise duty, octroi duty/entry tax,
Merit duty, central sales tax, sales tax, service tax etc.) in the case of the Indian Capital
Goods sector when compared to taxes faced by Capital Goods sectors of other nations.
Imposition of surfeit of taxes on Capital Goods sector increases the final price to the end
consumer, thereby stifling demand. The cost disadvantage due to indirect taxes to Indian
Capital Goods manufacturers can be as high as 24 percent in certain cases. Combining above
cost disadvantages with the high cost of finance and infrastructure inadequacies, the
domestic Capital Goods producers suffer from an overall cost disadvantage upto 34 per cent
against the imports.
Inversion of duty structure (higher import duty on select raw materials like copper, rubber
components etc. compared to that of finished Capital goods import) results in a reduced
effective protection rate for the electrical segment as a whole.
Zero-duty imports for projects like refinery, fertilizer etc. puts the domestic Capital Goods
industry at a clear disadvantage. The purchase preference in favour of public sector
enterprises results in distortion of the market mechanism. It deprives the private sector
firms of a level playing field and also erodes the profitability of the public sector enterprise.

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EXPORT PROMOTION POLICY ISSUES
Export transaction costs for Indian Capital Goods industry are among the highest in the
world. Heavy transaction costs not only increase the price of the final export product, but
also result in inordinate delays in export fulfilment, thus affecting export competitiveness.
According to available studies, total cost of transaction of engineering goods in India works
to around 10 per cent of the total export earnings. It is further estimated that if the
procedural complexities were eliminated, then the export sales of Indian Capital Goods is
likely to go up significantly (by 28 per cent as per Exim Bank estimates)
Indian Capital Goods industry also lags in strong institutional mechanisms for export credit
and promotion. Credit periods in international markets ranges from 90 to 360 days at
interest terms varying from 0.25 to 4 per cent with 1 to 3 years moratorium. In India the
interest rates vary from 6.5 to 10 per cent. The Export–Import Bank today raises money at
commercial rates from the market and is unable to offer competitive rates
Indian firms, in general, lack export thrust in their marketing strategies. The emergence of
global market, through lowering of tariff barriers, has led to blurring of margins between
domestic and export markets. Very few Indian firms have a global mindset. The focus is
largely on the domestic market; exports gain importance only in case of fall in domestic
demand

INDUSTRIAL STRUCTURE ISSUES
The ownership pattern in Indian Capital Goods Industry is marked by the dominance of
Public Sector Enterprises (PSEs) in heavy engineering, machine tools, boiler manufacturing,
while private firms prevail in industrial machinery segments such as cement, sugar and most
other non-electrical machinery. The impending privatization of these large PSEs would
radically change the industry structure. The firm structures and their ownership pattern at
the end of the privatization process would significantly affect the development of this sector
in the future.
Indian Capital Goods manufacturers have working capital requirements as high as 45 per
cent of net sales (against global benchmark of 15 per cent). High interest rate regime in India
results in a substantial 7 to 8 per cent interest rate differential relative to the reference
countries, amounting to 3.1 - 3.6 % capital cost disadvantage due to interest differential and
0.9 per cent due to higher working capital requirement.
The quality of infrastructure (transport, communication and power) is poor, thus affecting
competitive delivery schedules and increasing operating costs. The delivery time of locally
made Capital Goods in many cases is 1.5 to 2 times longer than in industrialized nations.
Companies tend to lose orders on delivery schedules. Inland transport is slow, although the
railroad density is among the highest in the world. The cost of electric power is comparable
to that in other nations, but the reliability is poor. Many Indian Capital Goods firms have set
up their own captive power plants to obviate the problem. This has added to the costs.
Overall the infrastructure inadequacies are estimated to translate into 5 per cent cost
disadvantage for Indian Capital Goods manufacturers’ vis-à-vis foreign manufacturers.
Indian Capital Goods sector is characterized by a large width of products (almost all major
Capital Goods are domestically manufactured) - a legacy of import-substitution policy. This is
reflected in the import and export weights calculated for the various reference and

Page 7 of 28


benchmark countries. Low values for both weights would indicate an inward oriented
economy focused on catering only to its demand through domestic production. In the case
of India, the import weight works to 21 percent, while the export weight is 7 percent. A case
in point is the vibrant German Capital Goods sector, which has an import weight of 32
percent and export weight of 41 percent with a self-sufficiency of 115 percent. Even nations
with advanced Capital Goods sector do not produce the entire range of Capital Goods, but
instead focus on select segments or sub segments. The Indian Capital Goods sector, on the
other hand, lacks sufficient depth largely due to low demand sophistication of the Indian
market, thus, resulting in comparatively low competitiveness. The case on hand, BHEL, has
been making equipment of assorted sizes and specifications because of lack of other orders.
Its ability to deliver was hampered by such customized orders and the absence of bulk
orders. If it standardizes its specifications and sizes, like Chinese do, it can easily ramp up its
capacity

Conclusion from Industry Analysis

Investors, however, remain divided about BHEL’s long-term prospects: While accounting for the
slowdown in fresh investments on capacity creation, it is noted that BHEL has a strong order book
and that should stand it in good stead. However, with the larger part of orders from central and
state utilities completed, the private sector is likely to dominate going ahead. These players prefer
Chinese manufacturers, which promise better delivery terms (28 months) and quote 25 per cent
lower prices. So, retaining market share might prove to be difficult for BHEL

Capital goods showed a spectacular performance with 11.8% growth compared to 7.8% growth in
Jun’08. In Apr-Jun’09 they declined to 1.0% compared to 7.9% growth in the previous period

<Swapna ---- what is the conclusion of the industry analysis ? what is the learning from it for
company analysis? ADD Appropriate FOOTNOTES>

<DO WE NEED THIS?>

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<THESE ARE SOME POINTS I HAVE COME ACROSS, SHALL I GO AHEAD & SUBSTANTIATE THEM WITH DATA?>
BHEL outsmarts all the other players as its COGS to sales % and selling and distribution expenses as a % of
sales stands very low in comparison to other companies.

BHEL is again the best in terms of EBITDA as % of sales.

BHEL’s operating expenses has been well managed over the years and hence its EBIT is better than its
competitors, closely followed by L&T.

ØBHEL’s fixed asset has been the lowest which shows less money is tied in fixed asset as compared to others.

C&G inventory has increased in the last year as compared to the other players and this can be a matter of
concern for the company

Thermax and BHEL’s net worth has decreased over the years due to use of more and more of their reserves
and surplus to fund their capital requirement.

BHEL and Thermax are using internal sources of financing to fund their capital requirement and so their total
borrowings is less whereas L&T and C&G are using debt to use financial leverage

ØBHEL’s ROE has been better than other players over the years but finally all are on the same platform.

Thermax has bettered all other companies due to smaller asset base and greater revenues from its operations.

At the end, it is BHEL which has outsmarted others due to less COGS and S&G expenses as compared.

ØC&G has managed its current ratio near to the industry average over the years which shows its ability to
manage its current assets and liabilities better. Besides that, other players have also maintained better current
ratio.

The smaller players, Thermax and C&G have been managing their inventory efficiently and it is above the
industry average

Average receivables period is very high for BHEL and L&T, but they have one respite that their payables period
is also very high. Thermax has been doing well in this case.

BHEL seems to be not managing its inventory properly as its average payables period is less than the average
receivables period and other players are having both things to be almost equal

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Ø Thermax might have some liquidity problem as its quick ratio is way below the industry average. Other
players are more or less comfortable in this field.

BHEL and Thermax are having almost zero debt and this shows that they are not using leverage to maximize
their profit. L&T seems to be optimally leveraged.

It shows that Thermax and C&G are having good demand for their products. BHEL needs to manage its debtors
a bit more efficiently as it is way below the industry average.

L&T and BHEL have higher EPS as they are established players in the sector and so their earnings have been
higher over the years.

Thermax and C&G are commanding higher P/E ratios as their future growth potential has been really high
due to their efficient management of resources and good demand for their products

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Company Analysis
Bharat Heavy Electricals Limited (BHEL) is one of the largest engineering enterprises of its kind in
India. BHEL is the largest domestic capital goods manufacturer in India and the 12th largest in the
world. The international competitors of BHEL are General Electric, Siemens, Alsthom and ABB. BHEL
offers a wide spectrum of equipment, systems and services in the field of power, transmission,
industry, transportation, oil & gas, non-conventional energy sources and telecommunication. Power
constitutes 52.5 per cent of its business. The company has 14 manufacturing divisions, 8 service
centers and 4 power sector regional centers. Its first plant was set up at Bhopal in 1956 under
technical collaboration with AEI, UK followed by three more major plants at Hardwar, Hyderabad
and Tiruchirapalli with Russian and Czechoslovak assistance.

Products & Services

BHEL manufactures over 200 products under 30 major product groups. The company has installed
equipment for over 64,000 mw of power generation for utilities, captive and industrial users. Its
strengths are comparable product range and cost competitiveness with foreign manufacturers. The
company enjoys a crucial advantage of depreciated assets. The company is cost-competitive when it
comes to power plant equipment and has bagged a number of power project orders placed in India
against open international competitive bidding.

The company has joint venture with Siemens for servicing old Indian fossil fuel power plants and
with GE for designing of heavy-duty gas turbines. A thirty-two thermal power stations equipped with
Bhel’s generating sets have been given productivity awards by the power ministry. Of these power
stations, eight have received gold medals. The awards have been given for meritorious and efficient
performance based on account of reduced inputs.

Bharat Heavy Electricals is mulling to pick up equity stake or even buy out forgings ventures in
Eastern Europe and China. BHEL’s chairman and managing director, K Ravi Kumar said the company
was looking at a Romanian firm and others in East Europe. He also said that Chinese firms are also
being looked at. He further said that the company was also keeping its options open on the idea of
picking up stake in the proposed Areva-Bharat Forge forgings venture. By adopting this strategy,
BHEL aims at blocking some capacity to tide over a shortage of forgings and casting being faced by
the company.

Company announced an investment of Rs 120 billion over the next four years to pick up equity in
power projects and to boost its capacity to support the generation of about 20,000 MW. The
company said that funding will come from internal accruals as BHEL is a cash-rich company. BHEL’s
current manufacturing capacity can support power generation of 10,000 MW. It includes 2,500 MW
of hydro electricity production, and 500 MW captive power plants for the industrial sector. A
thousand MW is exported and the power plants coming up can generate 6,000 MW. By the end of
this fiscal, the company hopes to make equipment for generating 15,000 MW.

As part of India’s largest solar power-based island electrification project in india, Bharat Heavy
Electricals (BHEL) has successfully commissioned two grid-interactive solar power plants of 100 KWp

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each in Lakshadweep. With this, the company has commissioned a total of eleven solar power plants
in the Lakshadweep islands, adding over 1 MW of solar power to the power generating capacity of
the coral islands in the Arabian Sea. The plants have been set up at Chetlat and Amini islands of
Lakshadweep. BHEL has earlier commissioned solar power plants of various ratings up to 150 KWp at
the islands of Agatti, Andrott, Bangaram, Bitra, Kadmat, Kalpeni, Kavaratti, Kiltan and Minicoy.

Bharat Heavy Electricals (BHEL) has achieved yet another milestone in the Middle East region with a
prestigious export order for two gas turbine generating units of 126 MW each from the Sultanate of
Oman. Valued at Rs 3,750 million, the order envisages supply and supervision of erection and
commissioning of two numbers state-of-the-art gas turbine generating units of 126 MW each for a
power project being set up by Petroleum Development Oman (PDO) at Amal, nearly 700 kms from
Muscat.

Company has secured prestigious contract worth Rs 40.15 billion (USD 845 million) from Hindalco
Industries. The order is for the supply and erection of the main plant package for its upcoming
captive power plant (6x150 MW) at Aditya Aluminium in Sambalpur district of Orissa. The order
comes close on the heels of an order placed on BHEL by Hindalco recently for a similar boiler and
turbine generator package for its captive power plant at Mahan Aluminium in Singrauli district of
Madhya Pradesh

Financials
Annual results for FY2008-09

Amount(Rs. in
Description
lakhs)
Net Sales/Income from Operations 2623419.00
Other Operating Income 62444.00
Increase/Decrease in Stock in trade and work in progress -115154.00
Consumption of Raw Materials 1712039.00
Employees Cost 411279.00
Depreciation 33427.00
Other Expenditure 235114.00
Total Expenditure 2276705.00
Profit from Operations before Other Income, Interest & Exceptional Items 409158.00
Other Income 78798.00
Profit before Interest & Exceptional Items 487956.00
Interest 3071.00
Profit after Interest but before Exceptional Items 484885.00
Profit(+)/Loss(-) from Ordinary Activities before tax 484885.00
Tax Expense 171064.00

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Net Profit(+)/Loss(-) from Ordinary Activities after tax 313821.00
Extraordinary Items -
Net Profit (+) / Loss (-) for the period 313821.00
Dividend (%) 170
Face Value (in Rs.) 10.00
Paid-up Equity Share Capital 48952.00
Reserves excluding Revaluation Reserves 1244929.00
Basic EPS before Extraordinary items (in Rs.) 64.11
Diluted EPS before Extraordinary items (in Rs.) 64.11
Basic EPS after Extraordinary items (in Rs.) 64.11
Diluted EPS after Extraordinary items (in Rs.) 64.11
Public Shareholding (Number of Shares) 158009600.00
Public Shareholding (%) 32.28
Promoter & Promoter group Number of Shares Non-encumbered 331510400.00
Promoter & Promoter group Shares Non-encumbered (as a % of total shareholding of
100.00
Promoter and Promoter Group)
Promoter & Promoter group Shares Non-encumbered (as a % total share capital of
67.72
the company)

Valuation

At current market price, stock is trading at 22.68 P/E multiple of its FY2010 estimated earnings. We
recommend investors to buy “BHEL” with medium to long term investment horizon.

Valuation Model (all calculations based on 2008 annual reports)

• Multi-Stage growth model
• Revenue Projection from 2007-08 annual report and 11th 5 year plan projections
• Cost model from historical data and its dependence on revenue by regression
• Verification of the cost model by looking at R2 value
• Historical dividend policy.
• Terminal distribution of surplus reserves as dividend.
• At the end a stable growth
• Discount rate estimated by CAPM on industry
• Rf taken as 90-day t-bill of RBI
• Rm taken as market return since 2001
• β of industry taken . Calculations shown below.

Company Beta equity Debt/Equity MktCap Beta assets
ALSTOM 0.170695078 0 3,443.15 0.170695078
BHEL 0.546713639 0.01 107,758.00 0.541300633

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Crompton 0.07584418 0.04 10,347.71 0.072927096
Amaraja 0.051710637 0.7 979.97 0.030418022

Beta asset avg 0.487245651
Debt/Equity 0.017771062
Beta equity
industry 0.495904523

2001
Rm 21.10% onwards
Rf 4.5842%
Re 12.78%

From the annual report the

• Capacity will go up from 10000 MW to 15000 MW in 2009.This will further go up to 20000
MW in 2012.
• Looking at the huge order backlog and revenue visibility it is apparent that capacity is the
bottleneck here.
• The revenue is expected to double by 2013 looking at the doubling of the capacity. This is in
line with the eleventh plan.
• A total of 4200 crore capital investment in the process.
• The investment is assumed to be put equally in 4 years from 2009 to 2012.
• The depreciation is calculated and is retired over a period of 10 years. Using straight line
method.

Cost Item Intercept X-variable R2

Raw Materials -548.14 0.5332 0.99

Power & Fuel Cost 145.23 0.0066 0.96

Employee Cost 1032.81 0.0750 0.57

Other
Manufacturing 74.05 0.0987 0.98
Expenses

Selling and
Administration -88.75 0.0461 0.86
Expenses

Miscellaneous
626.56 0.0000 0.01
Expenses

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• Except Misc expenses all others are linearly correlated. Since misc expenses don’t have
much of a linear relation with net sales, they are assumed to be constant at the 2008 value.

• The investments are assumed to be invested in some liquid mutual funds (7%) that would
earn something above the t-bill rate.

• The growth rate till 2012 is assumed to be 25%. It is then expected to drop a little to 15%
before stabilizing to 10% growth.

• Post the 15th year stable growth rate model is applied.

Ratios

Fixed Asset Turnover Ratio 18.74

Inventory/Sales 0.29

Receivable/Sales 0.62

Current Liabilities/Expenses 1.00

Dividend Payout Ratio 0.26

Cost of Equity 12.78%

Present value of 10 year Dividend 216

Present value of 11-15 year Dividend 122

16-inf 2041

Residual Value 436

Total Value 2815

Market Price (as of July 2nd 2008) 2056.55

Book Value as on March 2008 220.1

EPS as on March 2008 55.82

Price - Earning Ration as on July 2, 2008 36.84

Interest on investments 7%

Recommendation BUY

Page 15 of 28


Limitations of the model: Sensitive to the stable growth rate chosen. Small variations in the terminal
growth rate lead to large variations in the estimates of price.

Alternative Valuation Model
Based on PEG ratio: This is taking price as on 2nd July, 2008

Growth rate for next 3 PEG Recommendation for July 2,
PEG ratio as on 2nd July,2008
years Ratio 2008
At expected growth rate for next
25 1.47 SELL
3 years
PEG of 1 is typically fairly valued 20 1.84 SELL
15 2.46 SELL

As on 21st Aug 2009

PE ratio(for earnings PEG ratio at 30% PEG ratio at 25%
2009) growth growth
52 wk Low 984 13.81548262 0.460516087 0.552619305
52 wk High 2405 33.76649969 1.12554999 1.350659988
Current price(as on 21st 2297
32.26139833 1.075379944 1.290455933
Aug,2009) .8

Based on Reliance Money analyst report (Based on 2009 earnings and 2010, 2011
estimated earnings)

Comparison FY11 forward PE multiple
Industry 22
BHEL 19.02129617
Recommendation BUY as on 21st Aug 2009

Page 16 of 28


Reliance Money Report and calculations

Year 2008 2009 2010 2011
Net Sales 193046.4 248,645.90 314,636.60 385,115.20
%Growth 12% 28.80% 26.50% 22.40%
EBIDTA 33191.8 40,259.80 58,552.30 73,347.30
%Growth 2.80% 21.30% 45.40% 25.30%
Other Income 14447.6 8,609.30 10,639.60 12,921.30
Interest 354.2 412.9 517.1 611.2
Dep 2972.1 3,163.80 4,975.70 5,531.00
PBT 44313.1 45,292.30 63,699.10 80,126.40
%Growth 18.60% 2.20% 40.60% 25.8
Tax 19,620.50 15,852.30 22,294.70 28,044.20
Deferred tax -4027.7 -951.1 -1,274.00 -1,602.50
Adj PAT 28,720.30 30,391.10 42,678.40 53,684.70
%Growth 18.4 6.30% 40.40% 25.80%
Extraordinary -17.2
Reported PAT 28,703.10 30,391.10 42,678.40 53,684.70
%Growth 18.4 6.20% 40.40% 25.80%
Div% 152.5 245 250 270
EPS 58.4 62.1 87.2 109.7
BVPS 220.1 268 341.1 81.1
Dividend 7465.18 11993.24 12238 13217.04
Equity Cap 4,895.20 4,895.20 4,895.20 4,895.20
Reserves 102,846.90 126,313.10 162,066.60 208,826.40
Net Worth 107,742.10 131,208.30 166,961.80 213,721.60
Unsecured Loans 951.8 900.8 900.8 900.8
Total Loans 951.8 900.8 900.8 900.8
Total Liability 108,693.90 132,109.10 167,862.60 214,622.40
Net Block 16,392.90 26,835.50 28,298.00 31,126.20
Investments 82.9 82.9 82.9 82.9
Deferred Tax Assets 13,379.30 12,428.20 11,154.20 9,551.70
Inventory 57,364.00 71,934.80 88,084.20 105,984.80
Debtors 119,748.70 169,217.40 193,151.90 229,999.30
Cash Balance 83,860.20 83,923.50 133,257.80 182,969.80
Other CA 16,074.30 13,405.70 13,405.70 13,405.70
Current Liabilities 165,764.50 205,471.40 257,481.20 313,468.60
Provisions 32,443.90 40,247.40 42,090.80 45,029.30
NCA 78,838.80 92,762.60 128,327.60 173,861.60
Total Assets 108,693.90 132,109.10 167,862.60 214,622.40
Dividend growth rate 60.66% 2.04% 8.00%

Page 17 of 28


Technical Analysis
Yahoo Finance & iCharts.in were used to
generate the technical charts for BHEL.

From the 10 year and 5 year charts, we
observe that the company saw huge growth
from 2001 to mid-2006; and since then it
has been trading in a band (with support line
trending downwards). This is explained by
the increase in order book backlog since
2006.

To further analyse we took the 1 yr chart
which looks almost horizontal. The price has
traded below 50-day MA up to Mar’09 and
then has been trading slightly above 50-day
MA. This is possibly explained by the overall
market turnaround in Mar’09 and the stock
price has gone up on market momentum.

Page 18 of 28


Momentum Indicators

Looking at the momentum
indicators – MACD, RSI and MFI;
we find that MACD, MFI & RSI are
positively correlated. No
deviations in the money flow vs
the convergence-divergence
indicator shows that volume have
been supportive of the price
trends.

Page 19 of 28


Conclusions from Technical Analysis

• The charts indicate the BHEL has been trading in a band from 1200 to 2200 for more than 3
years. The price movements are in line with market momentum most of the time. In absence
of any break-outs or fundamental change in the company’s operations, a trading strategy
based on technical charts can be developed - buy on every oversold indication and sell on
every overbought indication from MACD and MFI indicators.

• As discussed in the company analysis, BHEL is going to add capacity in Dec 2009 and then
again in 2011-12. An early indication of this will show up in the charts with increase in
volume and price. Also, the MFI will indicate large money moving in, before the results for
Dec’09 quarter is out. This will be a good point to buy and hold for a long term, as it will
probably cause a breakout.

Page 20 of 28


Derivatives
Futures Analysis

Expiry on 27th Aug 2009
Process
• Look at the theoretical futures prices and its deviation from the actual prices.
• Look at the cost of carry numbers =+ve/-ve
• Look at the Open Interest numbers and see if they tell a story.
Daily Theoretic
spot al Deviation
Futures Change in Spot Differe price futures From theoretical Increase/dec Trend cost of
Date Price OI % Price nce return price price(%) rease Reversal carry
1-Jul-
09 2223 8.99% 2214.5 8.5 2231.2 -0.37% 8.5
2-Jul- 2153.5
09 2150 4.30% 5 -3.55 -2.75% 2169.5 -0.90% 0 -3.55
3-Jul-
09 2190.1 13.89% 2186.3 3.8 1.52% 2202.2 -0.55% 1 YES 3.8
6-Jul-
09 2073.25 1.82% 2100.5 -27.25 -3.92% 2115.0 -1.97% 0 YES -27.25
7-Jul-
09 2145 3.51% 2132.7 12.3 1.53% 2147.1 -0.10% 1 YES 12.3
8-Jul-
09 2043.25 5.00% 2047.9 -4.65 -3.98% 2061.5 -0.88% 0 YES -4.65
9-Jul- 2022.2
09 2015.3 8.40% 5 -6.95 -1.25% 2035.4 -0.99% 0 NO -6.95
10-Jul- 1985.9
09 1973.7 18.63% 5 -12.25 -1.80% 1998.6 -1.24% 0 NO -12.25
13-Jul- 1959.7
09 1957.75 4.17% 5 -2 -1.32% 1971.4 -0.69% 0 NO -2
14-Jul- 2047.5
09 2045.8 11.11% 5 -1.75 4.48% 2059.5 -0.66% 1 YES -1.75
15-Jul-
09 2172.1 2.58% 2187.2 -15.1 6.82% 2199.7 -1.25% 1 NO -15.1
16-Jul- 2200.4
09 2187.35 10.19% 5 -13.1 0.61% 2212.7 -1.15% 1 NO -13.1
17-Jul-
09 2228.65 -5.88% 2227.2 1.45 1.22% 2239.3 -0.48% 1 NO 1.45
20-Jul-
09 2277 93.12% 2276.6 0.4 2.22% 2288.1 -0.48% 1 NO 0.4
21-Jul-
09 2212.4 48.90% 2213.6 -1.2 -2.77% 2224.4 -0.54% 0 YES -1.2
22-Jul- 2146.6
09 2148.2 0.46% 5 1.55 -3.02% 2156.9 -0.40% 0 NO 1.55
23-Jul-
09 2175.2 4.74% 2168.2 7 1.00% 2178.2 -0.14% 1 YES 7
24-Jul- 2210.6
09 2208.85 6.42% 5 -1.8 1.96% 2220.6 -0.53% 1 NO -1.8
27-Jul-
09 2261.6 6.68% 2260.8 0.8 2.27% 2270.1 -0.37% 1 NO 0.8
28-Jul- 2263.5
09 2270.15 11.09% 5 6.6 0.12% 2272.5 -0.10% 1 NO 6.6
29-Jul-
09 2248.4 15.53% 2239.3 9.1 -1.07% 2247.9 0.02% 0 YES 9.1
30-Jul-
09 2210.9 15.79% 2200.8 10.1 -1.72% 2209.0 0.09% 0 NO 10.1
31-Jul-
09 2234.85 -1.34% 2230.3 4.55 1.34% 2238.3 -0.15% 1 YES 4.55
3-Aug- 2346.6
09 2351.55 -1.18% 5 4.9 5.22% 2354.1 -0.11% 1 NO 4.9
4-Aug- 2331.3
09 2335.5 -9.13% 5 4.15 -0.65% 2338.4 -0.13% 0 YES 4.15

Page 21 of 28


5-Aug-
09 2318.7 0.88% 2309.9 8.8 -0.92% 2316.6 0.09% 0 NO 8.8
6-Aug-
09 2272.3 -3.64% 2273.2 -0.9 -1.59% 2279.5 -0.32% 0 NO -0.9
7-Aug-
09 2182.9 2.66% 2183.2 -0.3 -3.96% 2189.0 -0.28% 0 NO -0.3
10-
Aug-09 2146.15 -0.55% 2148.5 -2.35 -1.59% 2153.3 -0.33% 0 NO -2.35
11- 2147.4
Aug-09 2145.8 -3.04% 5 -1.65 -0.05% 2152.0 -0.29% 0 NO -1.65
Cost of carry oscillates between positive and negative sides. So spot and futures should be treated as
2 different markets. Negative cost of carry does exist but any arbitrage opportunity will be erased by
transaction costs and taxes.
Open Interest change and price trends do not seem to give any pattern to have any correlation.
Maybe some more analysis is required.

Options Analysis

Process
• Analyze the variation of option prices with the underlying stock prices
• Look at the theoretical option pricing based on risk-free rate and historical annualized
volatility and examine the difference
• Look at the implied volatility based on the option price.
• Do this for ITM, OTM call and put option which is decided as on 11th Aug,2009
Current Market Price(as
on 11th Aug,2009) 2147
Interest Rate 5%
Expiry Date 8/27/2009
Div Yield 0%
OTM Call Strike Price 2160
Theoretical Call Value 109.0267
Theoretical Put Value 87.62995
Actual Call Value 74.4
Current Date 8/11/2009
DTE 16
Years 0.043836
Implied Call Volatility 43.69%
Historical Volatility 0.63
Implied Put Volatility 42.90%
OTM Put Strike Price 2100
Actual Put Value 52.95
ITM call strike price 2100
ITM Put Strike price 2200
Deep ITM call strike price 1900
Deep ITM put strike price 2400

Final implied Volatility
(based on 11th Aug,
pricing) 43%

Page 22 of 28


OTM Call Option at 2160
Theoretical value at Open Int
Date Underlying price Call at 2160 Theoretical value implied volatility Difference Implied Call Volatility
150
3-Aug-09 2346.65 119.7 261.3747654 224.0332809 -104.3333 0.004%
150
4-Aug-09 2331.35 119.7 247.4520088 210.1616256 -90.46163 0.004%
150
5-Aug-09 2309.9 119.7 229.2770602 191.7078295 -72.00783 0.004%
150
6-Aug-09 2273.2 119.7 201.0905789 162.5536194 -42.85362 12.127%
300000
7-Aug-09 2183.2 94.15 142.3022632 102.1096946 -7.959695 39.028%
300750
10-Aug-09 2148.5 75 113.2179646 76.23906465 -1.239065 42.332%
300900
11-Aug-09 2147.45 74.4 109.0749512 73.21060433 1.189396 43.667%
301050
12-Aug-09 2159.2 70.2 111.4934474 76.64967366 -6.449674 39.303%
300600
13-Aug-09 2225.6 92.75 145.9973477 113.4218587 -20.67186 29.613%
300600
14-Aug-09 2200.6 92.75 126.8258973 94.75348234 -2.003482 41.737%
300600
17-Aug-09 2181.25 71.75 102.6873871 74.3010344 -2.551034 41.195%
300600
18-Aug-09 2246.85 71.75 138.7121878 114.3336464 -42.58365 0.004%
300600
19-Aug-09 2214.85 71.75 112.9871153 88.61798624 -16.86799 28.149%
300300
20-Aug-09 2253.75 100 133.8615913 113.5249231 -13.52492 25.898%
300300
21-Aug-09 2301.8 130 165.1910313 150.7981669 -20.79817 0.004%
300300
24-Aug-09 2343.8 130 188.9577607 185.1730884 -55.17309 0.004%
300300
25-Aug-09 2303.5 130 147.9859379 144.5999616 -14.59996 0.004%
300300
26-Aug-09 2298.6 130 139.7048955 138.9133832 -8.913383 0.004%
As is evident from the above, only when the liquidity in terms of open interest increased did we see
the actual and theoretical prices(based on implied call volatility from 11th Aug price) converge. The
difference in implied call volatility suggests that the option pricing varies a lot with the volatility
number put in the model. This should depend on the expectations of the market at that particular
point of time and would keep varying with each day. So one number based on historical volatility
would not give the correct option price.

ITM Call Option at 2100
Call Theoretical value Implied
Date Underlying price at 2100 Theoretical value at implied volatility Difference Call Volatility Open Int
3-Aug-09 2346.65 131 303.5098803 272.0068753 -141.0069 0.004% 1200
4-Aug-09 2331.35 131 289.0274437 257.4451087 -126.4451 0.004% 1200
5-Aug-09 2309.9 131 269.8920818 237.7930455 -106.793 0.004% 1200
6-Aug-09 2273.2 131 239.6950756 206.0490319 -75.04903 0.004% 1200
7-Aug-09 2183.2 131 174.8629498 137.2291292 -6.229129 39.577% 1200
10-Aug-09 2148.5 131 143.4295701 107.8424972 23.1575 56.049% 1200
11-Aug-09 2147.45 131 139.2860326 104.7736527 26.22635 58.224% 1200
12-Aug-09 2159.2 96.7 142.8132206 109.7851662 -13.08517 34.824% 900

Page 23 of 28


13-Aug-09 2225.6 96.7 183.1890683 154.7980619 -58.09806 0.004% 900
14-Aug-09 2200.6 96.7 162.1851652 133.5682736 -36.86827 0.004% 900
17-Aug-09 2181.25 96.7 137.1095404 111.6600515 -14.96005 29.827% 900
18-Aug-09 2246.85 96.7 180.1627955 161.0212818 -64.32128 0.004% 900
19-Aug-09 2214.85 96.7 151.8707901 131.9835872 -35.28359 0.004% 900
20-Aug-09 2253.75 96.7 177.596322 162.8368268 -66.13683 0.004% 900
21-Aug-09 2301.8 96.7 214.5047261 205.7175438 -109.0175 0.004% 900
24-Aug-09 2343.8 96.7 245.8861828 244.6504215 -147.9504 0.004% 900
25-Aug-09 2303.5 96.7 204.9241973 204.0631084 -107.3631 0.004% 900
26-Aug-09 2298.6 96.7 198.929913 198.863813 -102.1638 0.004% 900

Again we see a huge difference in the pricing, mainly due to very less liquidity.

Page 24 of 28


OTM Put Option at 2100

Theoretical value at Implied
Date Underlying price Put at 2100 Theoretical value implied volatility Difference Put Volatility Open Interest
3-Aug-09 2346.65 57.55 50.54522901 30.88821095 26.66179 66.921% 300
4-Aug-09 2331.35 57.55 51.62552337 32.58679322 24.96321 66.341% 300
5-Aug-09 2309.9 57.55 54.20292543 35.85326861 21.69673 64.892% 300
6-Aug-09 2273.2 57.55 60.9687161 43.66936395 13.88064 61.092% 300
7-Aug-09 2183.2 41.5 86.39942026 73.49577845 -31.9958 39.005% 300
10-Aug-09 2148.5 56 90.45472812 83.13637004 -27.1364 43.644% 300
11-Aug-09 2147.45 51.1 87.62415251 81.42838475 -30.3284 41.821% 300
12-Aug-09 2159.2 51.1 79.66433531 73.38796307 -22.288 45.742% 300
13-Aug-09 2225.6 24.5 53.90321084 44.03069106 -19.5307 42.225% 300
14-Aug-09 2200.6 23.9 58.16236862 50.63289156 -26.7329 38.746% 450
17-Aug-09 2181.25 34.9 53.22612449 50.34237799 -15.4424 48.771% 2400
18-Aug-09 2246.85 11.9 30.94257243 25.04570271 -13.1457 43.125% 3300
19-Aug-09 2214.85 10 34.91379299 31.60078924 -21.6008 36.976% 3900
20-Aug-09 2253.75 3.1 22.00258389 17.87850674 -14.7785 34.595% 3750
21-Aug-09 2301.8 2 11.12427999 7.372565227 -5.37257 41.721% 3750
24-Aug-09 2343.8 2 1.295811014 0.560134618 1.439865 67.921% 3750
25-Aug-09 2303.5 2 0.897249725 0.557958367 1.442042 72.399% 3750
26-Aug-09 2298.6 2 0.066422724 0.042364629 1.957635 100.391% 3750
Again the difference in theoretical valuation based on implied volatility and the actual prices show a
divergence. The implied volatility number seems to vary a lot indicating a lot of uncertainty in the
market.

Let’s look at what difference the variation in price has on option prices and the corresponding delta,
gamma indicators

Put
Value at
implied
Variation Underl Theoretic Call Value at Theoretic put
in % ying al Call Implied al volatilit Call Put Call Put
points Price Value Volatility Put Value y Delta Delta Gamma Gamma
1 2168 120.4 84.9 79.3 45.3 0.54 -0.34 0.0020 0.0019
2 2190 132.4 97.1 71.6 38.6 0.59 -0.30 0.0020 0.0018
3 2211 145.0 110.2 64.5 32.6 0.63 -0.26 0.0019 0.0016
4 2233 158.3 124.1 58.0 27.4 0.67 -0.23 0.0018 0.0015
5 2254 172.1 138.8 52.0 22.9 0.71 -0.20 0.0017 0.0014
6 2276 186.5 154.4 46.5 19.0 0.74 -0.17 0.0016 0.0012
7 2297 201.5 170.6 41.5 15.7 0.77 -0.14 0.0015 0.0011
8 2319 217.0 187.6 36.9 12.8 0.80 -0.12 0.0013 0.0010
9 2340 232.9 205.1 32.8 10.5 0.83 -0.10 0.0012 0.0008
10 2362 249.4 223.2 29.1 8.5 0.86 -0.08 0.0011 0.0007
11 2383 266.3 241.7 25.7 6.8 0.88 -0.07 0.0009 0.0006
12 2405 283.5 260.8 22.7 5.5 0.90 -0.06 0.0008 0.0005
13 2426 301.2 280.2 19.9 4.4 0.91 -0.05 0.0007 0.0005
14 2448 319.3 299.9 17.5 3.5 0.93 -0.04 0.0006 0.0004
15 2469 337.7 319.9 15.3 2.7 0.94 -0.03 0.0005 0.0003
-1 2126 98.3 63.4 96.6 61.5 0.46 -0.42 0.0021 0.0020
-2 2104 88.2 54.1 106.1 71.0 0.41 -0.46 0.0021 0.0021

Page 25 of 28


-3 2083 78.8 45.7 116.4 81.4 0.37 -0.51 0.0020 0.0021
-4 2061 70.1 38.2 127.3 92.8 0.33 -0.55 0.0019 0.0021
-5 2040 62.0 31.6 138.9 105.2 0.29 -0.60 0.0018 0.0021
-6 2018 54.5 25.9 151.1 118.6 0.25 -0.65 0.0017 0.0020
-7 1997 47.7 20.9 164.0 132.9 0.21 -0.69 0.0016 0.0020
-8 1975 41.4 16.7 177.6 148.2 0.18 -0.73 0.0015 0.0019
-9 1954 35.8 13.2 191.9 164.3 0.15 -0.77 0.0013 0.0017
-10 1932 30.8 10.3 206.8 181.2 0.12 -0.80 0.0012 0.0016
-11 1911 26.2 7.9 222.3 198.8 0.10 -0.84 0.0010 0.0014
-12 1889 22.2 6.0 238.4 217.1 0.08 -0.87 0.0009 0.0013
-13 1868 18.7 4.4 255.1 236.0 0.06 -0.89 0.0007 0.0011
-14 1846 15.6 3.3 272.3 255.3 0.05 -0.91 0.0006 0.0010
-15 1825 12.9 2.3 290.0 275.2 0.04 -0.93 0.0005 0.0008

Here we would look at the impact of time on the theoretical option prices

Time Variation

Da
ys
Deep ITM Deep
to OTM call OTM put ITM call ITM put call ITM put
ex Theoretic Theoretic Theoretic Theoretic Theoretic Theoretic OTM OTM ITM ITM
pir al Call al Put al Call al Put al Call al Put call Put Call put Deep ITM Deep ITM
y Value Value Value Value Value Value theta theta theta theta Call theta Put theta

27 97.74 73.86 128.61 125.18 270.93 269.72 -1.99 -1.66 -1.95 -1.66 -1.193286 -1.005002
26 95.73 72.18 126.65 123.50 269.74 268.72 -2.03 -1.69 -1.98 -1.70 -1.192633 -1.005563
25 93.68 70.47 124.65 121.78 268.55 267.71 -2.06 -1.73 -2.01 -1.73 -1.191116 -1.005226
24 91.60 68.73 122.62 120.03 267.36 266.71 -2.10 -1.77 -2.05 -1.77 -1.188603 -1.003841
23 89.47 66.94 120.55 118.24 266.17 265.70 -2.15 -1.81 -2.09 -1.81 -1.184936 -1.001227
22 87.30 65.12 118.44 116.41 264.99 264.70 -2.19 -1.85 -2.13 -1.85 -1.179933 -0.997172
21 85.09 63.25 116.28 114.54 263.81 263.71 -2.24 -1.89 -2.18 -1.90 -1.173380 -0.991423
20 82.82 61.33 114.08 112.62 262.64 262.72 -2.29 -1.94 -2.23 -1.94 -1.165026 -0.983681
19 80.50 59.36 111.82 110.65 261.48 261.74 -2.35 -1.99 -2.28 -2.00 -1.154576 -0.973586
18 78.12 57.34 109.51 108.62 260.34 260.78 -2.41 -2.05 -2.34 -2.05 -1.141681 -0.960705
17 75.68 55.26 107.15 106.54 259.20 259.82 -2.48 -2.11 -2.40 -2.11 -1.125930 -0.944519
16 73.17 53.12 104.72 104.40 258.09 258.89 -2.55 -2.18 -2.46 -2.18 -1.106838 -0.924398
15 70.58 50.91 102.22 102.19 256.99 257.98 -2.63 -2.25 -2.53 -2.25 -1.083833 -0.899581
14 67.92 48.63 99.65 99.90 255.92 257.09 -2.71 -2.33 -2.61 -2.33 -1.056241 -0.869138
13 65.15 46.26 96.99 97.53 254.88 256.24 -2.81 -2.41 -2.70 -2.41 -1.023274 -0.831944
12 62.29 43.80 94.25 95.08 253.87 255.43 -2.92 -2.51 -2.80 -2.51 -0.984027 -0.786628
11 59.31 41.24 91.40 92.52 252.91 254.67 -3.04 -2.62 -2.90 -2.61 -0.937475 -0.731539
10 56.20 38.56 88.43 89.85 252.00 253.97 -3.18 -2.74 -3.03 -2.73 -0.882512 -0.664716
9 52.94 35.75 85.34 87.05 251.15 253.35 -3.35 -2.88 -3.17 -2.87 -0.818042 -0.583891
8 49.50 32.79 82.09 84.10 250.37 252.81 -3.54 -3.04 -3.33 -3.03 -0.743191 -0.486611
7 45.85 29.65 78.66 80.99 249.67 252.38 -3.77 -3.24 -3.52 -3.21 -0.657751 -0.370597
6 41.94 26.31 75.03 77.67 249.06 252.07 -4.06 -3.47 -3.75 -3.43 -0.563047 -0.234669
5 37.70 22.70 71.14 74.11 248.54 251.91 -4.43 -3.75 -4.04 -3.70 -0.463529 -0.080900
4 33.04 18.78 66.93 70.26 248.13 251.92 -4.93 -4.11 -4.39 -4.02 -0.369173 0.080888
3 27.77 14.46 62.32 66.04 247.80 252.07 -5.65 -4.57 -4.86 -4.44 -0.297097 0.225755

Page 26 of 28


2 21.58 9.59 57.16 61.35 247.52 252.35 -6.85 -5.19 -5.48 -4.94 -0.264086 0.312348
1 13.64 4.06 51.35 56.21 247.26 252.67 -9.46 -5.79 -6.08 -5.20 -0.260242 0.328672

Recommendation

BHEL does not seem to be a trading stock and has mostly been range bound for the last few years.
Its valuation seems to give a BUY indication and the new capacity additions might give a fillip to the
stock along with the recovery of the economy. The fundamentals of the company are strong and the
capacity expansion would start bringing in the revenues in 2010.So, one needs to look out for
oversold indicators and BUY on that. The July, 2008 valuations pegs the value at around 2800. The
2009 PE based valuation also gives it a strong BUY. In the absence of any technical triggers it would
be a BUY and HOLD strategy.

The futures pricing does not throw up any arbitrage opportunities. Also the trading volumes in the
options market is not very high which implies that the impact cost would be very high in the options
market and values are not close to the theoretical values.

Page 27 of 28


References
• Reliance Money BHEL Report 9th April, 2009

• Jaypee Capital Services Institutional Equity Research

• Crisil Research Press Release Aug 6,2009

• Crisil Research , Indian Infrastructure

• BHEL Annual Reports

Page 28 of 28

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