Infrastructure Sector: Power, Engineering and Construction

Companies in sectors such as power, engineering & construction, capital goods and transportation were analysed on parameters like past growth record, growth prospects going forward, operating margins vis-à-vis other companies and ability to finance growth. So it is very difficult to analyse the industry first and than company, while here we have to adopt a different approach company with peer valuation.

Bhel

Bhel has grown at a rate of 25% CAGR in the past three years. Its order book has gone up from Rs 15,800 crore to Rs 37,500 crore during the same period, and is equal to nearly three years' FY06 sales. It is currently undergoing an expansion programme to increase capacity from 6,000 mw to 10,000 mw at an investment of Rs 1,200 crore, which is expected to be completed by the end of this fiscal.

Apart from topline strength, its operating and other margins are also better than its counterparts to a considerable extent. An important differentiator for Bhel is its low raw material/sales ratio at 45.6%, against the industry norm of 60-65%. As a result, its operating margin stands at 19.5%, against 12-14% for major competitors. But Bhel lags in working capital management, which leads to significant capital being blocked as working capital

The stock is trading at a price-earnings (P/E) multiple of about 33, which is less than that of other big players like Siemens and ABB. The company has cash reserves of more than Rs 4,000 crore, which is adequate for all its current needs. The company's growth rate should remain strong in the next few years.