BHEL: Powerhouse

If the recommendations of the Sixth Pay Commission are fully implemented, there would be an incremental burden on the exchequer of Rs 7,975 crore each year. The panel is set up every 10 years to review the emoluments and pay of Central government employees.

Following the development, most Central PSUs will feel the blow of rising staff costs in their financials to some extent. Bharat Heavy Electricals (Bhel), India's largest power equipment maker, is expected to see a decline of 50 basis points in its operating profit margins for every 5% rise in wage costs, analyst Vinod Chari of Credit Suisse Group said in a note to clients on Wednesday.

Chari cut Bhel's share price target by 13% in the next 12 months to Rs 2,714 and has cut the earnings per share estimates for the year ending March 2010 by 8%, on anticipation that wages may climb 40% from 30% expected earlier.

Another concern for Bhel lately has been the dumping (as the currency is undervalued) by Chinese companies. The price difference is said to be up to 20%.

However, Bhel maintains that its equipment are relatively better than those of rivals and that the plant load factor of its projects is 90% as against 60% in case of Chinese equipment.

While the Sixth Pay Commission brings with itself some form of margin pressure for Bhel, the good part is that the company is experiencing robust order inflows. Bhel's new products, new technology and new captive power clients or independent power producers are driving order inflows.

Bhel is currently sitting on an order book of over Rs 82,000 crore, which reflects a 49% YoY growth led, by order intake of Rs 11,000 in Q4FY08 on new order flows. Revenues for the quarter increased 14% YoY to Rs 4,964.14 crore, while net profit increased by 15.6% to Rs 771.9 crore.

Bhel is expected to perform well in future, given its robust order book, access to super critical orders and efforts to improve competitiveness.

The stock has outperformed the broader Sensex and appreciated by 73.4% against the Sensex's increase of 22.5% in the past one year. At Rs 1,954.95, the stock trades at 22.4 and 18.03 times its estimated earnings for 2009 and 2010, respectively. It is a good pick in its space.

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