BHEL, ITC

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs1,954
Current market price: Rs1,665

Price target revised to Rs1,954

Result highlights

• In Q1FY2008 the net sales of Bharat Heavy Electricals Ltd (BHEL) grew by 21.7% to Rs3,233.9 crore and were slightly below our expectations.
• In the first quarter of FY2008, the company incurred a foreign exchange (forex) loss of Rs54 crore on its receivables as against a forex gain of Rs18 crore in Q1FY2007. We have treated both as extraordinary items; subsequently the operating profit margin (OPM) remained flat year on year (yoy) at 11.3%. The net profit before extraordinary items grew by 56.8% to Rs342.9 crore.
• The net profit after extraordinary items grew by 22.1% to Rs288.9 crore.
• The power business reported a 25.4% growth yoy in the revenues and expansion of 70 basis points in the profit before interest and tax (PBIT) margin whereas the industry business recorded a growth of 19.4% in its revenues and a dip of 100 basis points to 3.7% in the PBIT margin.
• BHEL recorded the most impressive order inflow in Q1FY2008 with inflows increasing by 138% yoy to Rs10,970 crore. The order backlog at the end of the quarter stood at a historic level of Rs62,400 crore.
• BHEL is likely to take minority stakes in state utilities to upgrade to super critical power plants. This strategy in turn would make BHEL the prime recipient of the equipment orders.
• To meet the surge in the demand the company plans to raise its boiler and turbine capacity from the existing 6,000 megawatt (MW) each to 15,000MW each over next three years. Out of the total additional capacity proposed, work on 4,000MW of capacity is on schedule and the capacity would be commissioned by December 2007.

ITC
Cluster: Apple Green
Recommendation: Buy
Price target: Rs200
Current market price: Rs158

ITC acquires Technico Pty Ltd

Key points

• ITC has acquired Technico Pty Ltd, Australia, through its wholly owned subsidiary, Russell Credit.
• Technico Pty Ltd was a subsidiary of Chambal Fertilisers and Chemicals (of the Zuari group) through the latter's subsidiary, Chambal Biotech Pvt Ltd, Singapore, which owned 77.65% of its equity. The financial details of the takeover have not been disclosed. We believe that the transaction is small and is unlikely to affect the financials of ITC.
• Technico Pty Ltd provides supply chain solutions to global customers by using proprietary technology (TECHNITUBER) to deliver early generation seed potato products and technology platforms to implement affordable early field generation seed potato programmes and rapidly introduce new varieties. It has seed manufacturing facilities in China, Canada, India and the Middle East. ITC already has farm linkages for buying potatoes through its e-Choupals. This acquisition will further strengthen its agri-input business and secure supplies for the salted snacks business sold under the brand Bingo (launched in March 2007).
• The company had earlier mentioned that its strategic intent is to secure long-term growth by exploiting emerging opportunities in the fast moving consumer goods (FMCG) sector. ITC's branded food business continues to expand rapidly with the sales growing by 51% over last year. We believe this is one small step toward its ultimate goal of gaining strong foothold in the fast growing Rs1,900-crore organised salty snacks market.
• We have always liked the way ITC has channelised the strong cash flows generated from its cigarette business into the other businesses of FMCG products, hotels, paperboards and now e-Choupals. At the current market price of Rs158.4, the stock is attractively quoting at 19.9x its FY2008E earnings per share and 12.6x FY2008E enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on ITC with a price target of Rs200.