Asia Pacific Equity Research

05 April 2009

▼ Neutral
Bharat Heavy Electricals (BHEL)
Previous: Overweight
BHEL.BO, BHEL IN
Price: Rs1,531.85
Too much premium for predictability, downgrade to
▼ Price Target: Rs1,300.00
Neutral Previous: Rs1,400.00

• BHEL’s provisional results for FY2009 showed strong execution and India
signs of easing material cost pressures. 4Q PAT was however 16.5% Engineering
lower than estimates (FY2009: Rs30.4B, 4Q: Rs12.5B) due to a sudden Shilpa Krishnan
AC

gratuity provision of Rs6B. We are disappointed that management (91-22) 6639-3010

had not anticipated or guided for this liability earlier. shilpa.x.krishnan@jpmorgan.com

Sumit Kishore
• We lower our estimates for FY2010 by 7%. We now have sales and (91-22) 6639-3007
PAT growth of 21.4% and 29.6% and EBITDA margin improvement of sumit.x.kishore@jpmorgan.com
290bps. Non-recurrence of gratuity provisions and end of wage hike J.P. Morgan India Private Limited
provisions account for the margin expansion.
Price Performance
• During the meltdown, BHEL’s outperformance and premium 2,000
multiples arose from predictability of growth (at least the topline) in Rs 1,400
a difficult environment. An OB of ~Rs1180B guarantees visibility
through 2012. This OB remains relatively immune to cancellations due 800
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
to the predominance of gov’t utility power projects with guaranteed
returns. The company’s ability to allay market fears of execution BHEL.BO share price (Rs)
NIFTY (rebased)
bottlenecks was also an important contributor to outperformance. YTD 1m 3m 12m
Abs 9.3% 10.9% 8.8% -17.3%
• However, the return of risk appetite will likely see markets placing a
Rel 3.4% -9.2% 3.4% 15.2%
lower premium to this predictability. In our view, L&T (OW) might
outperform BHEL in a rising market, as it has done in past rising
markets. We revisit our 'everything goes right' DCF model originally
published 15 months back and believe our new Mar-2010 PT of Rs1,300
(down from Rs1400 earlier, terminal growth rate (g):6%, WACC: 11.5%,
terminal year: FY17), implying 16.2-x FY2010 earnings, is fair for the
stock. We downgrade the stock to Neutral. Key upside risk to our PT is
stronger than expected margin improvement and a rise in investor
preference for safe growth stocks.
BHEL (Bloomberg: BHEL IN; Reuters: BHEL.BO)
Rs. in millions, year-end March
FY08 FY09E FY10E FY11E
Sales 193,046 254,879 309,409 386,403 52-week range (Rs) 984.1-1934
Net profit (adjusted) 25,892 30,390 39,400 49,242 Market cap (Rs B) 749.9
EPS (Rs) 52.9 62.1 80.5 100.6 Market cap (US$ B) 14.9
DPS (Rs) 15.3 17.9 23.2 29.0 Shares o/s (MM) 489.5
Net sales growth (%) 12.0 32.0 21.4 24.9 Free float (%) 32.3
Net profit growth (%) 8.1 17.4 29.6 25.0 Avg. daily value (Rs MM) 2396.0
EPS growth (%) NM 17.4 29.6 25.0 Avg. daily value (US$ MM) 47.5
ROE (%) 26.5 23.8 28.5 29.3 Avg. daily volume (MM ) 1.70
ROCE (%) 45.2 34.9 43.1 44.4 Exchange rate (Rs/US$) 50.4
BVPS (Rs) 220.1 255.9 309.4 376.4
P/E (x) 29.0 24.7 19.0 15.2
P/BV (x) 7.0 6.0 5.0 4.1
EV/EBITDA (x) 16.3 12.2 12.1 9.0
Source: J.P. Morgan estimates, Company data.

See page 19 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Valuation and stock view

The strong outperformance of BHEL over the last 12 months has prompted us to
revisit the ‘Everything goes right’ scenario in our DCF model, originally published
15 months back. This model is a simplified top-down version, where we begin by
modeling India’s power capacity addition, and then BHEL’s market share, margins
and so on. Clearly, assumptions on power capacity addition, industry sector growth,
margins, WACC, near-term cash-flow accretion and value-addition from power
project JVs are significantly lower than what we had 15 months ago. Based on this
analysis, we conclude that it is difficult to model a scenario justifying the current
stock price. An ideal blue sky scenario would result in a fair value of Rs1,435, while
a more realistic scenario results in a fair value of Rs1,300 (down from Rs1,400
earlier, terminal growth rate (g):6%, WACC: 11.5%, terminal year: FY17) which is
our current DCF-based PT.

Table 1: Everything goes right DCF scenario (not our base-case)

Rs. in billions, year-end March
2008 2009 2010 2011 2012 2013 2014 2015 2016 2022
India's capacity addition (GW) 10 12 15 17 19 21 23 25 27 39
Total installed capactity (GW) 140 152 167 184 203 224 247 272 299 503
BHEL's mkt share (%) 60 65 65 65 65 65 65 65 65 65
BHEL's domestic delivery (GW)) 6.0 7.8 9.8 11.1 12.4 13.7 15.0 16.3 17.6 25.4
BHEL's overseas delivery (GW) 0.9 1.5 1.5 1.5 1.5 3.0 3.5 4.0 4.0 4.0
BHEL's total delivery (MW) 6.9 9.3 11.3 12.6 13.9 16.7 18.5 20.3 21.6 29.4
Per MW prices (Rs mn) 25.0 25.8 26.5 27.3 28.1 29.0 29.9 30.7 31.7 37.8
% escalation 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0

Power revenues (Rs bn) 172.5 239.5 298.4 342.8 389.7 482.5 550.8 622.6 682.5 1,109.9
Industry revenues (Rs bn) 55.8 75.3 86.6 86.6 90.9 101.9 114.1 127.8 143.1 282.5
% growth 35.0 15.0 - 5.0 12.0 12.0 12.0 12.0 12.0
Total revenues (Rs bn) 228.3 314.8 385.0 429.5 480.7 584.4 664.8 750.4 825.6 1,392.3
EBIT margin 13.2 10.2 12.5 14.6 15.0 15.0 15.0 15.0 15.0 15.0
Tax rate 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0 34.0
EBIT (1-t) % 8.7 6.7 8.3 9.7 9.9 9.9 9.9 9.9 9.9 9.9
Depreciation 3.0 3.2 4.1 4.8 5.5 5.8 6.0 6.2 6.5 7.7
NOPAT/Rev (%) 10.0 7.8 9.3 10.8 11.1 10.9 10.8 10.8 10.7 10.5
NOPAT (Rs bn) 22.9 24.4 35.9 46.3 53.2 63.8 72.0 80.7 88.4 145.9
Capex (Rs bn) (8.0) (11.6) (12.0) (12.0) (12.0) (4.0) (4.0) (4.0) (4.0) (3.0)
Incremental working cap to sales
(5.9) 11.7 2.0 1.1 0.0 3.0 3.0 3.0 3.0 3.0
(%)
Additional working capital (Rs bn) 13.4 (36.8) (7.6) (4.5) (0.1) (14.5) (16.5) (18.7) (20.5) (33.3)
FCF (Rs bn) 28.3 (23.9) 16.3 29.8 41.1 45.3 51.5 58.0 63.9 109.6
WACC (%) 11.0 11.0 11.0 11.0 13.0 13.0 13.0 13.0 13.0
Disc factor 1.0 1.0 0.9 0.8 0.7 0.6 0.5 0.5 0.4 0.2
DCF (Rs bn) 28.3 (23.9) 14.7 24.2 30.1 27.8 27.9 27.9 27.2 22.4
Sum of DCF (Rs bn) 304
Terminal
Disc. terminal value (Rs bn) 339 6.0
g (%)
Add: cash in hand (Rs bn) 60
Value for power projects (Rs bn) 0
Market cap (Rs bn) 703
Per share (Rs) 1,434
Source: J.P. Morgan estimates, Company data.

2
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Table 2: Indian Capital Goods: Valuation comps & estimates

Rs. in millions, year-end March
Company Rating CMP Target price Mkt cap P/E(x) EV/EBITDA
(Rs) (Rs) (US$ bn) FY09E FY10E FY11E FY09E FY10E FY11E
BHEL N 1,532 1,300 14.9 24.7 19.0 15.2 12.2 12.1 9.0
ABB N 440 500 1.8 16.5 14.4 12.1 10.4 8.8 7.1
Siemens UW 272 188 1.8 17.9 15.2 12.5 8.2 7.0 5.4
Crompton Greaves N 131 120 0.8 9.6 8.8 8.2 4.7 4.3 3.7
Larsen & Toubro OW 717 880 8.4 14.3 12.1 11.0 11.3 10.1 9.4
Punj Lloyd N 107 130 0.6 15.3 6.1 6.4 6.1 5.7 5.2
Source: J.P. Morgan estimates, Company data. Note: P/E and EV/EBITDA estimates for Siemens and ABB have been fiscalized.

Tracking multiples and stock performance over time

Historically, BHEL’s P/E multiple has shown a high correlation to the revenue
visibility provided by its order book. However, over the last 5 quarters, the focus has
shifted from order book to execution. Concerns on execution, coupled with weak
market sentiment have led to a decline in multiples despite the continued OB
expansion (Figure 1 & 2).

Another commonly used multiple for BHEL is the EV/OB (Figure 3). Barring the
FY06-08 phase when markets were exceptionally bullish, BHEL has traded at an
EV/OB ranging from 0.3x (FY00) to 0.6x (current).

From the movement of these multiples over cycles, we conclude that BHEL’s
multiples, which appear cheap vis-à-vis recent history, are currently at
normalized mid-cycle levels. With limited potential for OB expansion from present
high levels, we believe multiples too might remain at current levels or drift lower.

Figure 1: BHEL: Analyzing correlation between P/E and OB visibility (trailing 12-months)
Year-end March

50.0 6.00

45.0
5.00
40.0

35.0
4.00
30.0

25.0 3.00

20.0
2.00
15.0

10.0
1.00
5.0

0.0 0.00
4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

P/E (LHS) Visibility (RHS)

Source: J.P. Morgan estimates, Company data.

3
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Figure 2: BHEL: Analyzing correlation between P/E and OB visibility (1-year forward)
Year-end March

40 4

30 3

20 2

10 1

0 0
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

P/E (x ) OB v isibility (fw d 12-mth rev )

Source: J.P. Morgan estimates, Company data.

Figure 3: BHEL: EV/OB trend

Year-end March

OB (Rs B, LHS) EV (Rs B, LHS) EV/OB (x, RHS)

1,200 1.8
1.6
1,000
1.4
800 1.2
1.0
600
0.8
400 0.6
0.4
200
0.2
0 0.0
FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

Source: J.P. Morgan estimates, Company data.

Tracking BHEL’s performance vs. L&T over time

BHEL’s P/E multiple vs. L&T has been at an average premium of ~60% over the last
2 decades (Figure 4, 5). However, in our experience, L&T has tended to outperform
analysts’ EPS estimates much more sharply, as compared to BHEL, during periods
of economic boom. Thus, what appears to be a premium multiple in hindsight, is
misleading. From our experience, BHEL tends to trade at 10-15% premium to L&T
over the cycle with two exceptions: 1) During the peak of the markets (Eg: 2008), we
found L&T’s multiples outstripping those of BHEL, as L&T is perceived to be a
bigger growth play during such times and 2) When markets are weak, BHEL’s
premiums to L&T tend to expand, as BHEL is always considered a safer growth
stock than L&T

4
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Figure 4: 1-yr forward P/E: BHEL & L&T

50.0
40.0
30.0
20.0
10.0
0.0
2

8
v-9

v-9

v-9

v-9

v-9

v-9

v-9

v-9

v-0

v-0

v-0

v-0

v-0

v-0

v-0

v-0

v-0
No

No

No

No

No

No

No

No

No

No

No

No

No

No

No

No

No
BHEL L&T

Source: J.P. Morgan estimates.

Figure 5: 1-yr forward P/E(x): BHEL's historical premium/ (discount) to L&T

200
150
100
50
0
-50
Nov-92

Nov-93

Nov-94

Nov-95

Nov-96

Nov-97

Nov-98

Nov-99

Nov-00

Nov-01

Nov-02

Nov-03

Nov-04

Nov-05

Nov-06

Nov-07

Nov-08
BHEL Premium/ (Discount) to L&T (%)

Source: J.P. Morgan estimates.

BHEL’s absolute performance vs L&T and relative performance vs Sensex offers

interesting conclusions, in our view. Since 1996, BHEL has outperformed the Sensex
and L&T in bear market. L&T has underperformed the Sensex in bear markets (see
charts for FY96-98, FY00-03, and FY08-now).

In the bull markets of 03-07, both L&T and BHEL massively outperformed the
Sensex. L&T marginally outperformed BHEL. In the bull rally in 98-99 too L&T had
outperformed BHEL.

Thus, historically, performance of L&T>BHEL>Sensex in bull markets and

performance of BHEL>Sensex>L&T in bear markets. BHEL has had a positive
impact on a portfolio irrespective of market movement, but L&T has had an
even more positive impact during bull markets. During bear markets, L&T is
the stock to avoid, in our view.

5
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Figure 6: Price Performance: L&T, BHEL & Sensex (96-98)

300
250
200
150
100
50
0
6

8
96

97

98
96

97

97

98

98
t-9

r-9

r-9
t-9

t-9
c-9

c-9
n-

n-

n-
g-

b-

g-

b-

g-
Oc

Oc

Oc
Ap

Ap
De

De
Ju

Ju

Ju
Au

Fe

Au

Fe

Au
BHEL L&T Sensex

Source: Bloomberg, J.P. Morgan.

Figure 7: Price Performance: L&T, BHEL & Sensex (98-99)

300
250
200
150
100
50
0
Dec-98 Jan-99 Feb-99 Mar-99 Apr-99 May -99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov -99 Dec-99

BHEL L&T Sensex

Source: Bloomberg, J.P. Morgan.

Figure 8: Price Performance: L&T, BHEL & Sensex (00-03)

125
105
85
65
45
25
5
-15
00

01

02

03
0

2
0

00

01

02

3
0

2
0

3
l-0

l-0

l-0
-0

-0

-0

-0
v-0

v-0

v-0
-0

-0

-0

-0
n-

n-

n-

n-
p-

p-

p-
ar

ar

ar

ar
ay

ay

ay

ay
Ju

Ju

Ju
Ja

Ja

Ja

Ja
Se

Se

Se
No

No

No
M

M
M

BHEL L&T Sensex

Source: Bloomberg, J.P. Morgan.

6
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Figure 9: Price Performance: L&T, BHEL & Sensex (03-07)

2500
2000
1500
1000
500
0
03

04

05

06

07
03

04

05

06

07

7
c-0

-0

c-0

-0

c-0

-0

c-0
c-0

-0
n-

n-

n-

n-

n-
p-

p-

p-
p-

p-
ar

ar

ar

ar
De

De

De

De

De
Ju

Ju

Ju

Ju

Ju
Se

Se

Se

Se

Se
M

M
L&T Sensex BHEL

Source: Bloomberg, J.P. Morgan.

Figure 10: Price performance: L&T, BHEL & Sensex (08-now)

100

80

60

40

20

0
Jan-08 Feb-08 Mar-08 Apr-08 May -08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov -08 Dec-08 Jan-09 Feb-09 Mar-09

L&T Sensex BHEL

Source: Bloomberg, J.P. Morgan.

Financials: growth drivers in place

Revenues: demand in place, capability to supply is the
constraint
BHEL has an order backlog of ~Rs1180B as on 31Mar 2009, providing earnings
visibility through FY12. ~84% of OB is accounted by power sector, ~9% by industry
and balance 7% by exports. State & Central government orders constitute ~85-90%
of the order book; balance is from private sector players. This OB remains relatively
immune to cancellations due to the predominance of gov’t utility power projects with
guaranteed returns.

In FY09 BHEL has reported Rs597B of new orders (+18.7% YoY). In our view
FY10, would be the peak year of 12th Plan (FY13-FY17) ordering; the country is
targeting capacity addition of ~95GW in the next plan period.

The average execution period of projects is ~36months. The margins are higher in
BTG/ product orders and are lower in EPC orders. The EPC orders include BOP and
civil work where value addition and profit margins are lower. The composition of

7
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

order book in the 10th plan period (FY03-07) had a higher chunk (70:30) of EPC
orders. Over the past many quarters BHEL has been booking more product orders,
bringing the composition of EPC to BTG orders down to around 50:50.

BHEL follows percentage completion method of booking revenues on orders. Given

that demand is in place, execution capacity is the only constraint. Current capacity is
10GW, increasing to 15GW by Dec-2009 and 20GW by Dec-2011. We are not
unduly concerned that capacity constraints would pose a serious risk to growth,
barring one-off quarterly fluctuations in execution and revenue recognition.

Figure 11: BHEL: Order booking, Order backlog and visibility trend for BHEL
Year-end March

Order booking (Rs bn, LHS) Order backlog (Rs bn, LHS)
Years of visibility (RHS)

1,200 6.00

1,000 5.00

800 4.00

600 3.00

400 2.00

200 1.00

0 -
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Source: J.P. Morgan estimates, Company data.

Operating margins: the contribution of operating leverage

likely to be lower going ahead
There are 3 important determinants of margins: pricing, material cost and operating
leverage.

Competitive pressures on pricing unlikely to be felt near term: In our view,

power plant equipment prices have been firm over the past few years, mainly owing
to reduced Chinese competitive pressures as a result of the RMB appreciation vs
INR. However, competition from L&T is likely to be stronger going ahead. This
might impact margins beyond FY12, as revenues through FY12 are already secured.

Easing material cost likely to be a positive margin contributor: As of now, 60%

of the orders are on cost-plus basis and balance 40% are fixed price contracts. In
FY09, raw material, erection and engineering expenses were 60.3% of net sales,
~100bps higher than FY08. Typically BHEL maintains an inventory of 3-4 months
for indigenous materials and 6 months for imported materials. Commodity prices
were at their peak in Sep-q, thus the maximum impact on margins was felt during the
Sep & Dec quarters where OPM declined 420bps and 300bps respectively. The raw
material cost pressures have eased out considerably in 4Q09 in our view.

Operating leverage-led margin gains unlikely through FY12, barring the near-
term impact of cessation of wage-arrear provisioning: Operating leverage was the

8
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

most important contributor to margin expansion between FY02-07 (Figure 12).

While BHEL’s capacities were underutilized, the company was overstaffed. Increase
in capacity utilization via more shifts and minor de-bottlenecking, coupled with the
reduction of staff strength from 68K to 43K contributed greatly to the reduction of
fixed overheads, even as revenue continued to grow.

Figure 12: BHEL: Operating leverage in employee and other expenses

25.0

20.0
15.0

10.0
5.0

0.0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E FY12E

Manpow er cost (ex -w age prov ision) Other ex penses [a]

Source: J.P. Morgan estimates, Company data. Note: [a] Other expenses include sales & admin expense, power & fuel, stores & spares and stock variation.

Going forward, employee numbers are slated to rise to 53K (currently 46K), while
manufacturing capacity is slated to double to 20GW (currently 10GW). In our view,
these factors would result in an absolute increase in fixed overheads, and fixed
expenses as % of sales are likely to remain flat at best.

In FY10, we expect a 290bps margin improvement as provisions for wage arrears are
done with. We believe overall employee cost would decline in absolute terms (Table
2). The implementation of 6th Pay Commission recommendations would result in
40% increase in per employee wages. We have not factored in margin improvement
on account of commodity price decline for FY10, and we shall wait for June-q results
to review our assumptions.

Table 3: BHEL: Employee cost estimates

Rs. in millions, year-end March
FY2007 FY2008 FY2009E FY2010E FY2011E
No of employees (yr-end) 42,124 43,636 46,000 50,000 53,000
Per employee wages (Rs, based on average employees) 559,216 608,137 699,357 979,100 1,077,010
% increase 9 15 40 10
Employee cost (Rs mn) 23,690 26,077 31,344 46,997 55,466
Wage arrears provision (Rs mn) 800 5,140 19,000 0 0
Other provisions (Rs mn) 0 2,000 0 0 0
Total employee cost (Rs mn) 24,490 31,217 50,344 46,997 55,466
Source: J.P. Morgan estimates, Company data.

9
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Table 4: BHEL: P&L statement

Rs. in millions, year-end March
FY08 FY09E FY10E FY11E FY12E
Gross Sales 214,977 275,050 334,496 417,733 426,598
Less: Excise duty (21,322) (20,171) (25,087) (31,330) (31,995)
Net Sales 193,655 254,879 309,409 386,403 394,603
Other op income 4,927 6,200 6,200 6,200 6,200
(Inc)/Dec in WIP 8,273 10,754 10,754 10,754 10,754
Raw material consumption (114,895) (153,701) (186,484) (232,889) (239,964)
Staff cost (31,459) (50,344) (46,997) (55,466) (56,513)
Other expenses (21,906) (26,245) (33,359) (38,959) (42,562)
Total Expenditure (159,987) (219,536) (256,085) (316,559) (328,284)
EBIDTA 38,595 41,544 59,524 76,044 72,519
Other income 9,035 7,295 5,554 5,849 7,387
EBIDT 47,630 48,839 65,077 81,893 79,907
Interest (354) (300) (300) (300) (300)
Depreciation (2,972) (3,239) (5,081) (6,984) (8,653)
PBT 44,304 45,300 59,697 74,609 70,953
Tax (15,711) (14,910) (20,297) (25,367) (24,124)
Reported PAT 28,593 30,390 39,400 49,242 46,829
EPS 58.4 62.1 80.5 100.6 95.7
13,962 13,495 11,754 12,049 13,587
Growth (%)
Net Sales 31.6 21.4 24.9 2.1
PAT 6.3 29.6 25.0 (4.9)

Key ratios (%)

Raw Material to Sales 59.3 60.3 60.3 60.3 60.8
Excise duty to sales 9.9 7.3 7.5 7.5 7.5
Staff Cost to sales 16.2 19.8 15.2 14.4 14.3
Other exp to sales 11.3 10.3 10.8 10.1 10.8
EBIDTA margin 19.9 16.3 19.2 19.7 18.4
Effective tax rate 35.5 32.9 34.0 34.0 34.0
Source: J.P. Morgan estimates, Company data.

First-cut analysis of FY2009 provisional results

BHEL’s provisional results for FY2009 showed strong execution and signs of easing
material cost pressures. 4Q PAT was however 16.5% lower than estimates (FY2009:
Rs30.4B, 4Q: Rs12.5B) due to a sudden gratuity provision of Rs6B. In a television
interview, management said that that at the last minute they had to provide for
gratuity increase as well as the recent hike announced by the finance ministry – as a
result they had to provide for about Rs 19B instead of Rs 13B anticipated earlier. We
are disappointed that management had not anticipated or guided for the Rs6B
gratuity provision earlier. Management continues to guide towards a 20-25% revenue
growth and 25-30% PAT growth in FY2010.

10
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Table 5: BHEL: Mar-q & FY09 detailed estimates post provisional results
Rs. in millions, year-end March
9M09 9M08 %YoY FY09E FY08 %YoY 4Q09E 4Q08 %YoY
Gross Sales 169,551 135,378 25.2 275,050 214,977 27.9 105,499 79,599 32.5
Less: Excise duty (12,610) (13,744) (8.3) (20,171) (21,322) (5.4) (7,561) (7,578) (0.2)
Net Sales 156,941 121,634 29.0 254,879 193,655 31.6 97,938 72,021 36.0
Other op income 3,144 2,463 27.6 6,200 4,927 25.8 3,056 2,464 24.0
(Inc)/Dec in WIP 9,793 4,342 125.5 10,754 8,273 30.0 961 3,931 (75.5)
Raw material consumption (101,977) (72,952) 39.8 (153,701) (114,895) 33.8 (51,724) (41,943) 23.3
Staff cost (27,053) (19,799) 36.6 (50,344) (31,459) 60.0 (23,291) (11,660) 99.7
Other expenses (16,653) (13,191) 26.2 (26,245) (21,906) 19.8 (9,592) (8,715) 10.1
Total Expenditure (135,890) (101,600) 33.8 (219,536) (159,987) 37.2 (83,646) (58,387) 43.3
EBIDTA 24,195 22,497 7.5 41,544 38,595 7.6 17,349 16,098 7.8
Other income 5,908 7,258 (18.6) 7,295 9,035 (19.3) 1,387 1,777 (21.9)
EBIDT 30,103 29,755 1.2 48,839 47,630 2.5 18,736 17,875 4.8
Interest (226) (312) (27.6) (300) (354) (15.3) (74) (42) 76.2
Depreciation (2,334) (2,145) 8.8 (3,239) (2,972) 9.0 (905) (827) 9.4
PBT 27,543 27,298 0.9 45,300 44,304 2.2 17,757 17,006 4.4
Tax (9,636) (9,813) (1.8) (14,910) (15,711) (5.1) (5,274) (5,898) (10.6)
PAT 17,907 17,485 2.4 30,390 28,593 6.3 12,483 11,108 12.4
EPS 36.6 35.7 2.4 62.1 58.4 6.3 25.5 22.7 12.4

Key ratios (%)

Raw Material to Sales 65.0 60.0 60.3 59.3 52.8 58.2
Excise duty to sales 7.4 10.2 7.3 9.9 7.2 9.5
Staff Cost to sales 17.2 16.3 19.8 16.2 23.8 16.2
Other exp to sales 10.6 10.8 10.3 11.3 9.8 12.1
EBIDTA margin 15.4 18.5 16.3 19.9 17.7 22.4
Effective tax rate 35.0 35.9 32.9 35.5 29.7 34.7
Source: J.P. Morgan estimates, Company data.

Table 6: BHEL: Key model revisions

Rs. in millions, year-end March
2009E 2010E 2011E
Revenues old 250,115 314,444 388,492
Revenues new 254,879 309,409 386,403
Revision (%) 1.9 (1.6) (0.5)
YOY growth (%) 32.0 21.4 24.9

EBITDA old 41,170 58,400 78,231

EBITDA new [a] 38,148 56,616 73,714
Revision (%) (7.3) (3.1) (5.8)
YOY growth (%) (7.0) 48.4 30.2

EBITDA margin(%) old 16.5 18.6 20.1

EBITDA margin(%) new 15.0 18.3 19.1
Revision (bps) (149.3) (27.4) (106.0)

Adjusted PAT old 32,859 42,216 54,727

Adjusted PAT new 30,390 39,400 49,242
Revision (%) (7.5) (6.7) (10.0)
YOY growth (%) 17.4 29.6 25.0

Diluted EPS old (Rs) 67.1 86.2 111.8

Diluted EPS (Rs) new 62.1 80.5 100.6
Revision (%) (7.5) (6.7) (10.0)
Source: J.P. Morgan estimates.

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 Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Table 7: BHEL: Reported orders in Mar-q

Date Description Size (Rs. Mn.)
27-Feb-09 BHEL received the first-ever order for Steam Generators for New Rating 700 MWe Nuclear Sets. The order has been placed on 3,450
BHEL by Nuclear Power Corporation of India limited (NPCIL) for Kakrapara Atomic Power Project (KAPP) in Gujarat. For the first
time in India, NPCIL is installing two units of 700 MWe rating at KAPP, the highest rating developed indigenously, based on
Pressurised Heavy Water Reactors, the other order has been placed on L&T.
Valued at Rs.3,450 Million, the order envisages manufacture and supply of 4 Steam Generators, for use in the Primary cycle of the
Nuclear Power Plant for one Reactor of 700 MWe unit rating.
23-Feb-09 Outbidding Chinese equipment suppliers under international competitive bidding, Bharat Heavy Electricals Limited (BHEL) has won 31,500
an order for the main plant package at the upcoming Malwa Thermal Power Project (TPP) in Madhya Pradesh, involving two new-
rating units of 600 MW each. Valued at Rs.31,500 Million, the order for the greenfield power project has been placed on BHEL by
Madhya Pradesh Power Generating Company Limited (MPPGCL).
9-Feb-09 BHEL has bagged four major contracts from various customers for the supply and installation of main plant equipment for thermal 70,000
power projects. The projects, with a cumulative capacity of 3,250 MW, are located in Madhya Pradesh, Uttar Pradesh, Tamil Nadu
and Maharashtra. Cumulatively valued at around Rs.70,000 Million, the contracts have been placed on BHEL by NTPC Ltd.
(2000MW), NLC Tamil Nadu Power Limited (1000MW) and Mahagenco (250MW).
Source: Company reports.

Working capital: a near term concern

Net working capital may have gone up from negative Rs5B as on March-08 to
Rs31.7B as of Mar-09, in our estimate. The following factors have been responsible
for the increase in our view-

• Higher inventory due to execution pressures. Inventory days have gone up

sharply from their FY07 levels (100 days) to around ~156 days in FY09.

• Although we expect marginal decrease in the collection period, liberal credit

terms to vendors led to higher working capital pressure, in our view

• Sharp rise in loans & advances

Customer advance as a percentage of turnover may have gone up significantly as

well - this offsets higher working capital need to some extent

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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Table 8: BHEL: Working capital details and key efficiency metrics

Rs. in millions, year-end March
FY04 FY05 FY06 FY07 FY08 FY09E FY10E FY11E
Current assets :
Inventories 21,039 29,161 37,444 42,177 57,364 92,242 113,336 141,539
Sundry debtors 46,085 59,721 71,681 96,958 119,749 148,838 185,118 231,184
Cash & Bank Balances 26,596 31,779 41,340 58,089 83,860 55,513 66,988 89,783
Loans & advances 10,392 12,297 11,999 11,409 11,863 35,000 30,000 10,000
Others 135 472 845 1,997 4,211 10 10 10
Total current assets 104,247 133,430 163,308 210,630 277,047 331,604 395,453 472,516

Current liabilities :
Sundry Creditors 17,380 20,997 28,041 35,390 43,851 44,464 57,099 70,689
Advances (customers) 31,330 45,849 54,792 77,755 113,946 151,951 180,628 213,044
Others 3,259 4,359 5,245 5,834 7,967 8,365 8,784 9,223

Provisions :
Taxation 1,282 1,228 1,477 980 (2,015) (2,015) (2,015) (2,015)
Dividends 830 1,256 490 2,937 3,060 10,164 13,177 16,469
Others 9,287 10,770 13,156 21,305 31,399 31,399 31,399 31,399

Total current liabilities 63,369 84,459 103,200 144,201 198,208 244,329 289,072 338,809

Net current assets 40,878 48,971 60,108 66,429 78,839 87,275 106,381 133,707
Net current assets (ex-cash) 14,282 17,192 18,768 8,340 (5,021) 31,761 39,393 43,924

Inventory turnover (x) 3.6 3.1 3.2 3.6 3.0 2.3 2.5 2.4
Inventory (days) 101 119 114 100 121 156 149 150

Receivables/Sales (%) 53 58 49 52 56 55 55 55
Collection period (days) 194 211 180 189 204 202 202 202

Payables/purchase (%) 23 23 23 23 25 21 21 21
Average credit received (days) 83 86 86 84 93 75 75 75

Customer advances as % of turnover 36 44 38 41 53 57 54 51

Source: J.P. Morgan estimates, Company data.

Working capital pressures may be responsible for BHEL’s negative FCF in FY09, in
our view. BHEL has generated negative FCF only twice since FY95. See Table 8 for
contribution of net-working capital components to FCF

Table 9: BHEL: Contribution of change in working capital components to FCF

Rs. in millions, year-end March
FY05 FY06 FY07 FY08 FY09E FY10E FY11E
Decrease/ (Increase) in current assets (24,001) (20,317) (30,573) (40,646) (82,904) (52,374) (54,268)
-Inventory (8,122) (8,283) (4,733) (15,187) (34,878) (21,094) (28,203)
-Sundry Debtors (13,637) (11,959) (25,278) (22,791) (29,090) (36,280) (46,065)
-Loans & advances (1,905) 298 590 (455) (23,137) 5,000 20,000
-Others (337) (373) (1,152) (2,214) 4,201 0 0

Increase/ (Decrease) in current liabilities 21,090 18,741 41,001 54,007 46,121 44,743 49,737
-Sundry Creditors 3,617 7,044 7,349 8,462 613 12,635 13,590
-Advances (customers) 14,519 8,943 22,964 36,191 38,005 28,677 32,416
-Others 1,100 886 589 2,133 398 418 439
-Provisions 1,855 1,868 10,100 7,222 7,105 3,013 3,292

Decrease in net current assets (ex-cash) (2,910) (1,576) 10,428 13,361 (36,783) (7,631) (4,531)
FCF 4,160 12,253 28,057 27,497 (28,210) 15,376 31,829
Source: J.P. Morgan estimates, Company data.

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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

The working capital pressures are on expected lines considering the impact of the
ongoing credit crunch; however we believe that in FY10 and FY11 the incremental
impact of increase in WC on FCF would be muted.

BHEL continues to have a strong balance sheet with FY09 estimated net-cash of
Rs55B.

Table 10: BHEL: Balance Sheet

Rs. in millions, year-end March
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009E FY 2010E FY 2011E

Share capital 2,448 2,448 2,448 4,895 4,895 4,895 4,895

Reserves and surplus 57,821 70,566 85,435 102,847 120,360 146,583 179,356
Share holders equity 60,269 73,014 87,883 107,742 125,255 151,478 184,251
Secured loans 5,000 5,000 - - - - -
Unsecured loans 370 582 893 952 893 893 893
Total Borrowings 5,370 5,582 893 952 893 893 893

Total Capital 65,639 78,596 88,776 108,694 126,149 152,371 185,144

Gross Fixed Assets 36,289 38,221 41,351 44,435 56,015 73,015 89,015
(Less) Acc. Depreciation 26,193 28,528 31,171 34,031 39,111 46,095 54,749
Capital work in progress 953 1,846 3,025 6,580 10,000 8,000 7,000
Net Fixed Assets 11,396 11,668 12,913 16,393 26,412 34,528 40,975
Investments 90 83 83 83 83 83 83
Cash and Bank Balances 31,779 41,340 58,089 83,860 55,513 66,988 89,783
Net Current Assets ex-cash 17,192 18,768 8,340 (5,021) 31,761 39,393 43,924
Total Assets 65,639 78,596 88,776 108,694 126,149 152,371 185,144

Net Debt (26,409) (35,757) (57,196) (82,908) (54,620) (66,095) (88,890)

Source: J.P. Morgan estimates, Company data.

We estimate capex of Rs45B over the next three years for ongoing capacity
expansion from 10GW to 15GW, followed by further expansion to 20GW. This can
easily be met through internal accruals (estimated 90B of retained earnings from
FY10-12), in our view. We have forecasted strong operating cash flows for BHEL
over FY10-12 as impact of incremental working capital pressures is muted.

Table 11: BHEL will deliver strong positive FCF from FY10-12
Rs. in millions, year-end March
FY2007 FY2008 FY2009E FY2010E FY2011E FY2012E
EBIT 31,999 33,215 35,344 53,324 69,844 66,319
D&A 2,730 2,972 3,239 5,081 6,984 8,653
Tax 13,214 15,711 14,910 20,297 25,367 24,124
Decrease in WC 10,428 13,361 (36,783) (7,631) (4,531) (84)
Operating CF 31,944 33,838 (13,110) 30,476 46,929 50,764

Capex (3,887) (6,340) (15,100) (15,100) (15,100) (15,100)

Investing CF (3,887) (6,340) (15,100) (15,100) (15,100) (15,100)
FCF 28,057 27,497 (28,210) 15,376 31,829 35,664
Source: J.P. Morgan estimates, Company data.

Business mix and competitive analysis

The order inflow mix between power & industry segments has shifted in favor of
power sector over the last few years. In the 90's the mix was ~50:50 and now the

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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

power to industry mix is 80:20. Management expects share of industrial segment to

increase to 30% going forward, once their forays into transportation and private
sector transmission begin to contribute to sales. We have neither factored in capex
for these new ventures nor modelled revenues for the BHEL's foray into
transportation/transmission currently, as we await more clarity.

Figure 13: BHEL: Power & Industry segment order inflows

Rs. in billions, year-end March

500 100

400 80

300 60

200 40

100 20

0 0
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E

Pow er (LHS) Industry (LHS) Pow er as % of total (RHS)

Source: J.P. Morgan estimates, Company data.

A similar trend is observed in the revenue composition also.

Figure 14: BHEL: Power & industry segment revenue composition

Rs. in billions, year-end March

250 100

200 80

150 60

100 40

50 20

0 0
FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09E

Pow er (LHS) Industry (LHS) Pow er as % of total (RHS)

Source: J.P. Morgan estimates, Company data.

Competitive analysis
In the power segment, BHEL receives bulk of its order from central government
owned utilities (NTPC, DVC) and the State Gencos (earlier known as SEBs). BHEL
has a share of approximately 75% of central power orders and 83% of SEB orders in
the 11th Plan which would be completed till FY12, in our view.

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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Table 12: Share of orders of likely to be commissioned or already commissioned 11th Plan power
projects
In MW
Sector Orders Placed on Total Market share (%)
Central BHEL 16,256 76
Others 5,240 24
State BHEL 18,235 83
Others 3,766 17
Private BHEL 2,040 12
Others 15,566 88
Total BHEL 36,531 60
Others 24,572 40
Grand Total 61,103
Source: J.P. Morgan estimates, Infraline.

Other players that supply to Indian utilities include: Chinese equipment suppliers –
mainly Dongfang and Shanghai Electric – estimated market share of 20-25%,
Hyundai – 5% and a slew of other players – Siemens, L&T-Mitsubishi, Toshiba,
Alstom accounting for the rest of the market share. Chinese players have had the
most visible market share gain over the past 5 years, especially with private utilities
such as Reliance Power, Lanco, Jindals and Sterlite. Government owned utilities
have, by-and-large, persisted with BHEL. BHEL’s advantage arises from a long-
standing manufacturing presence in India, which has made it cost competitive and
also provides an advantage in the supply of spares and services.

The government has recently initiated measures to favour domestic manufacturers.

For the forthcoming tenders of supercritical projects (11 plants envisaged), bidding
would be restricted to players with domestic manufacturing. We view L&T as
potentially the strongest competitor to BHEL, once its domestic manufacturing JV
with Mitsubishi commences manufacturing (slated for late FY11).

A brief background of BHEL

BHEL is currently the largest engineering and manufacturing enterprise in India in
the energy sector. The company has been earning profits continuously since 1971-72
and paying dividends since 1976-77. BHEL's operations are organized around three
business sectors, namely Power, Industry - including Transmission, Transportation,
Telecommunication & Renewable Energy - and Overseas Business (which
constitutes ~7% of OB, we have not modeled overseas business separately as the
revenue streams can be classified under power & industry).

As per company reports, BHEL has-

• Installed equipment (boiler, turbine and generators) for over 90,000 MW of

power generation -- for Utilities, Captive and Industrial users.
• Supplied over 2,25,000 MVA transformer capacity and other equipment
operating in Transmission & Distribution network up to 400 kV (AC &
DC).
• Supplied over 25,000 Motors with Drive Control System to Power projects,
Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc.
• Supplied Traction electrics and AC/DC locos to power over 12,000 km
Railway network.
• Supplied over one million Valves to Power Plants and other Industries.
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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

BHEL: Summary of Financials

Profit and Loss statement Cash flow statement
Rs in millions, year-end Mar FY07 FY08 FY09E FY10E Rs in millions, year-end Mar FY07 FY08 FY09E FY10E

Gross Revenues 187,390 214,010 275,050 334,496 EBIT 31,999 33,215 35,344 53,324
% change Y/Y 29% 14% 29% 22% D&A 2,730 2,972 3,239 5,081
Gross Margin (%) 18% 19% 21% 17% Tax 13,214 15,711 14,910 20,297
EBITDA 33,718 41,007 57,148 56,616 Decrease in WC 10,428 13,361 (36,783) (7,631)
% change Y/Y 31% 22% 39% -1% Operating CF 31,944 33,838 (13,110) 30,476
EBITDA Margin (%) 18% 19% 21% 17%
EBIT inc OI 39,311 52,450 67,404 63,289 Capex (3,887) (6,340) (15,100) (15,100)
% change Y/Y 35% 33% 29% -6% Change in investments 0 0 0 0
EBIT Margin (%) 21% 25% 25% 19% Investing CF (3,887) (6,340) (15,100) (15,100)
Net Interest 433 354 300 300 FCF 28,057 27,497 (28,210) 15,376
Earnings before tax 37,159 44,304 45,300 59,697
% change Y/Y 45% 19% 2% 32% Change in equity 0 2,448 0 0
Tax 13,214 15,711 14,910 20,297 Change in debt (4,689) 59 (59) 0
as % of EBT 36% 35% 33% 34% Net Interest paid (433) (354) (300) (300)
Net Income (pre
exceptionals) 23,945 28,594 30,390 39,400 Other income 8,323 14,415 13,495 11,754
% change Y/Y 42% 19% 6% 30% Deferred tax asset (2,614) (4,028) 1,000 1,000
Shares Outstanding 244.76 489.52 489.52 489.52 Dividend & div tax paid (6,925) (8,734) (10,164) (13,177)
EPS (pre exceptionals) 97.8 58.4 62.1 80.5 Misc. adjustment (7,582) (9,559) (3,110) (2,177)
% change Y/Y 42% -40% 6% 30% Financial CF (11,307) (1,726) (137) (3,901)
Change in cash 16,749 25,771 (28,347) 11,475
Opening cash balance 41,340 58,089 83,860 55,513
Closing cash balance 58,089 83,860 55,513 66,988
Balance sheet Ratio Analysis
Rs in millions, year-end Mar FY07 FY08 FY09E FY10E %, year-end Mar FY07 FY08 FY09E FY10E

Cash and cash equivalents 58,089 83,860 55,513 66,988 EBITDA margin 18% 19% 21% 17%
Accounts receivable 96,958 119,749 148,838 185,118 Net profit margin 14% 13% 12% 13%
Inventories 42,177 57,364 92,242 113,336
Others 1,997 4,211 10 10 Sales per share growth 29% 14% 29% 22%
Current assets 210,630 277,047 331,604 395,453 Sales growth 29% 14% 29% 22%
Net profit growth 42% 19% 6% 30%
Investments 83 83 83 83 EPS growth 42% -40% 6% 30%
Net fixed assets 12,913 16,393 26,412 34,528
Others 0 0 0 0 Interest coverage (x) NA NA NA NA
Total assets 223,625 293,523 358,099 430,064 Net debt to total capital -26% -28% -15% -15%
Net debt to equity -65% -77% -44% -44%
Liabilities Sales/assets 0.8 0.7 0.8 0.8
Payables 35,390 43,851 44,464 57,099 Assets/equity 2.5 2.7 2.9 2.8
Others 108,812 154,357 199,865 231,973
Total current liabilities 144,201 198,208 244,329 289,072
Total debt 893 952 893 893 ROE 30% 26% 24% 28%
Other liabilities 52,493 63,891 80,791 94,379 ROCE 45% 45% 35% 43%
Total liabilities 197,587 263,051 326,014 384,344
Shareholders' equity 87,883 107,742 125,255 151,478
BVPS 359.1 220.1 255.9 309.4
Source: J.P. Morgan estimates, Company data.

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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

All Data As Of 03-Apr-09

Q-Snapshot: Bharat Heavy Electricals Ltd.

Quant Return Drivers (a Score >50% indicates company ranks 'above average') J.P. Morgan Composite Q-Score
Score 0% (worst) to 100% (best) vs Country vs Industry Raw Value
100% HIGH/STRONGER
Value
P/E Vs Market (12mth fwd EPS) 20% 33% 1.5x C
75%
P/E Vs Sector (12mth fwd EPS) 25% 24% 1.2x O
EPS Growth (forecast) 81% 86% 24.7% U
50%
Value Score 38% 50% N
Price Momentum T
25%
12 Month Price Momentum 82% 69% -16.5% R
1 Month Price Reversion 71% 85% 10.9% Y 0%
LOW/WEAKER
Momentum Score 83% 75% 0% 25% 50% 75% 100%
Quality
Return On Equity (forecast) 80% 93% 29.7% INDUSTRY
Earnings Risk (Variation in Consensus) 86% 76% 0.09 Quant Return Drivers Summary (vs Country)
Quality Score 85% 94%
100%
Earnings & Sentiment
Earnings Momentum 3mth (risk adjusted) 63% 85% -16.7 75%
1 Mth Change in Avg Recom. 11% 7% -0.12 50%
Net Revisions FY2 EPS 47% 72% 0% 25%
Earnings & Sentiment Score 39% 48%
0%
COMPOSITE Q-SCORE* (0% To 100%) 60% 69% VALUE PRICE QUALITY EARNINGS

Targets & Recommendations** EPS Revisions** EPS Momentum (%) Historical Total Return (%)
30 Targets Recoms 15 0.5 50 40
Consensus Changes (4wks)
Consensus Changes (4wks)

25 0.0 40

(Local Currency %)
20 10 -0.5 30
-1.0 20 11 9
(%)

15
-1.5 10
10 5 -2.0 0
5 -2.5 -10
0 0 -3.0 -20
-16
Up Dn Unchanged Up Dn Unchanged -1 Mth -3 Mth 1Mth 3Mth 1Yr 3Yr
FY1 FY2 FY1 FY2
Consensus Growth Outlook (%)
40.0 34.3 23.9 27.0 24.9
15.0
20.0
0.0
-20.0
-40.0
-60.0 -44.4
EPS Actual To FY1 EPS FY1 To FY2 EPS FY2 To FY3 Cash Flow FY1 To FY2 Dividends FY1 To FY2 Sales FY1ToFY2

Closest in Country by Size (Consensus. ADV = average daily value traded in US$m over the last 3 mths)
Code Name Industry USD MCAP ADV PE FY1 Q-Score*
500325-IN Reliance Industries Ltd. Oil Refining/Marketing 48,994 48.91 17.3 41%
500312-IN Oil & Natural Gas Corp. Ltd. Oil & Gas Production 33,889 5.37 8.8 21%
532555-IN NTPC Ltd. Electric Utilities 28,985 4.65 19.1 85%
532454-IN Bharti Airtel Ltd. Wireless Telecommunications 23,012 8.40 14.4 73%
500209-IN Infosys Technologies Ltd. Information Technology Services 15,525 6.46 13.9 62%
500103-IN Bharat Heavy Electricals Ltd. Electrical Products 14,203 9.74 22.8 60%
500875-IN ITC Ltd. Tobacco 13,669 2.13 21.0 48%
500112-IN State Bank of India Regional Banks 13,439 23.27 7.9 43%
532540-IN Tata Consultancy Services Ltd. Information Technology Services 10,499 3.00 10.7 49%
500696-IN Hindustan Unilever Ltd. Household/Personal Care 10,172 2.10 22.7 96%
530965-IN Indian Oil Corp. Ltd. Oil Refining/Marketing 9,221 0.65 10.4 38%

Source: Factset, Thomson and J.P. Morgan Quantitative Research. For an explanation of the Q-Snapshot, please visit http://jpmorgan.hk.acrobat.com/qsnapshot/
Q-Snapshots are a product of J.P. Morgan’s Global Quantitative Analysis team and provide quantitative metrics summarized in an overall company 'Q-Score.'
Q-Snapshots are based on consensus data and should not be considered as having a direct relationship with the J.P. Morgan analysts’ recommendation.
* The Composite Q-Score is calculated by weighting and combining the 10 Quant return drivers shown. The higher the Q-Score the higher the one month
expected return. On a 14 Year back-test the stocks with the highest Q-Scores have been shown (on average) to significantly outperform those stocks with the
lowest Q-Scores in this universe. ** The number of up, down and unchanged target prices, recommendations or EPS forecasts that make up consensus.

18
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Other Companies Recommended in This Report (all prices in this report as of market close on 02 April 2009)
Larsen & Toubro (LART.BO/Rs717.25/Overweight)
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures

• Analyst Position: The following analysts (and/or their associates or household members) own a long position in the shares of Larsen
& Toubro: Bharat Iyer, Bijay Kumar.
• Client of the Firm: Bharat Heavy Electricals (BHEL) is or was in the past 12 months a client of JPMSI. Larsen & Toubro is or was
in the past 12 months a client of JPMSI; during the past 12 months, JPMSI provided to the company non-investment banking
securities-related service and non-securities-related services.
• Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment
banking services in the next three months from Larsen & Toubro.
• Non-Investment Banking Compensation: JPMSI has received compensation in the past 12 months for products or services other
than investment banking from Larsen & Toubro.

Bharat Heavy Electricals (BHEL) (BHEL.BO) Price Chart

4,935 Date Rating Share Price Price Target

N Rs2,850 (Rs) (Rs)
4,230 03-Apr-06 OW 1149.02 2600.00
OW Rs2,850 OW Rs2,200 OW Rs1,400
31-Jul-07 OW 1644.00 2111.00
3,525
30-Oct-07 OW 2612.10 2850.00
OW Rs2,600 OW Rs2,111 OW Rs2,850 OW Rs1,950
2,820 31-Oct-07 N 2654.55 2850.00
Price(Rs) 04-Feb-08 OW 2060.20 2850.00
2,115 04-Apr-08 OW 1754.95 2200.00
23-Jul-08 OW 1597.50 1950.00
1,410 26-Oct-08 OW 1080.25 1400.00

705

0
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
06 06 06 06 07 07 07 07 08 08 08 08 09

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage May 18, 2004 - Sep 28, 2004. This chart shows J.P. Morgan's continuing coverage of this stock; the
current analyst may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

Larsen & Toubro (LART.BO) Price Chart

Date Rating Share Price Price Target

3,528 OW Rs1,200 (Rs) (Rs)
24-May-06 N 583.80 1206.50
2,940 OW Rs1,600 29-Sep-06 N 633.75 603.50
19-Jul-07 OW 1164.78 1601.00
N Rs1,206.5N Rs603.5 OW Rs1,601
OW Rs2,267.5 OW Rs1,750 OW Rs880
2,352 28-Oct-07 OW 2138.72 2267.50
Price(Rs) 29-May-08 OW 1354.55 1750.00
1,764 29-Jul-08 OW 1361.78 1600.00
16-Oct-08 OW 893.15 1200.00
1,176
20-Nov-08 OW 732.20 880.00

588

0
Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
06 06 06 06 07 07 07 07 08 08 08 08 09

Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends.
Break in coverage Mar 03, 2004 - Sep 28, 2004. This chart shows J.P. Morgan's continuing coverage of this stock; the
current analyst may or may not have covered it over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector
and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Shilpa Krishnan: ABB Ltd (ABB.BO), Bharat Heavy Electricals (BHEL) (BHEL.BO), Crompton
Greaves Limited (CROM.BO), GMR Infrastructure Ltd (GMRI.BO), Gammon India Ltd (GAMM.BO), Hindustan
Construction Company (HCNS.BO), IVRCL Infrastructure Ltd (IVRC.BO), Jaiprakash Associates Ltd (JAIA.BO), Larsen
& Toubro (LART.BO), NTPC (NTPC.BO), Nagarjuna Construction Company Limited (NGCN.BO), Punj Lloyd Ltd
(PUJL.BO), Reliance Infrastructure Ltd (RLIN.BO), Reliance Power (RPOL.BO), Siemens India (SIEM.BO), Suzlon
Energy Ltd (SUZL.BO), Tata Power (TTPW.BO)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2009

Overweight Neutral Underweight
(buy) (hold) (sell)
JPM Global Equity Research Coverage 35% 46% 19%
IB clients* 54% 54% 42%
JPMSI Equity Research Coverage 35% 51% 14%
IB clients* 75% 73% 57%
*Percentage of investment banking clients in each rating category.
For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.

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Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

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21
Shilpa Krishnan Asia Pacific Equity Research
(91-22) 6639-3010 05 April 2009
shilpa.x.krishnan@jpmorgan.com

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