Tata Motors, BHEL

Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,845
Current market price: Rs1,753

FY2008 performance below expectations

Key highlights

• Bharat Heavy Electricals Ltd (BHEL) has announced provisional numbers for FY2008, reporting a growth of 15.3% year on year (yoy) in its turnover to Rs21,608 crore. The net profit has been up 16.6% yoy to Rs2,815 crore as against Rs2,415 crore in FY2007. The growth has been below our and street expectations.
• Deriving Q4FY2008 from the provisional numbers, the revenue (gross) has reported a growth of 6.5% yoy to Rs8,070.2 crore, while the net profit has declined by 7.3% to Rs1,066.4 crore.
• In our view, slower than expected execution rate and project specific delays could be the possible reasons for the lower-than-expected growth in the top line.
• Order inflows continue to be strong during FY2008 with a 41% increase to Rs50,265 crore. The order backlog at Rs85,500 crore is at a record high and the company has the largest order book among the Indian companies.
• During the quarter the company has made provision for a 40% increase in employee wage to take into account the Sixth Pay Commission's proposals. The company has also made provisions for contractual obligation, consequently impacting the margins in Q4FY2008.
• On the super critical power plant front, the company has won order for the National Thermal Power Corporation's Barh-II project (2x660MW), while the equipment for the Tamil Nadu Electricity Board (TNEB) project (2x800MW) would also be supplied by BHEL as it would be holding a 26% stake in the joint venture company between TNEB and BHEL. The company has also bid for the Andhra Pradesh Power Generation Corporation project.
• The company has brought on stream additional 4,000MW of capacity during January 2008 taking the total production capacity to 10,000MW. Further, 5,000MW of additional capacity would be bought on stream by the end of CY2009. Additional capacity coupled with strong order book of Rs85,500 crore (3.9x FY2008 revenues) should aid strong revenue and profit growth for BHEL going forward. Currently, we are maintaining our estimates for FY2009 and FY2010 awaiting further clarity. We reiterate our Buy recommendation and at the current market price the stock is discounting it FY2009E and FY2010E earnings by 20.9x and 15.4x respectively.
  

Tata Motors
Cluster: Apple Green
Recommendation: Hold
Price target: Rs792
Current market price: Rs629

Conference call highlights
In a post Jagaur-Land Rover acquisition conference call, the management of Tata Motors discussed some of the details of the deal along with the future product pipeline of both the brands. The key highlights of the conference call are presented.