Apart from the price-to-earnings (P/E) ratio, another parameter that is commonly used to value stocks is price-to-book value (P/BV). But what does P/BV means and how can investors use this parameter to value their investments? In this article, we will try and simplify this concept P/BV is a valuation ratio and is arrived at by dividing the market price of a share with the respective company's book value per share. Now, book value is equal to the shareholder's equity (share capital plus reserves and surplus). Book value can also be arrived at by subtracting current liabilities and debt from total assets. For the banking and finance companies, book value is calculated as 'share capital plus reserves minus miscellaneous assets not written off. P/BV is a good metric to value stocks of companies in the capital-intensive industries like engineering, automobiles and banks, which have large amount of tangible assets in their books (balance sheet). If a company is trading at a P/BV of less than 1, this indicates any or both of the two - Investors believe that the company's assets are overvalued, or The company is earning a poor return on its assets. A high P/BV indicates vice versa, i.e., markets believe the company's assets to be undervalued or that the company is earning and is expected to earn in the future a high return on its assets. Book value also has a relationship with the 'Return on Equity' of a company. In fact, book value can also be termed as equity (equity capital plus reserves and surplus). As such, for a company that earns a high return on equity, investors would be ready to give the stock a high P/BV multiple
CASE STUDY: BHARAT HEAVY ELECTRICAL Ltd.
INTRODUCTION BHEL is the largest engineering and manufacturing enterprise in India in the energy-related/infrastructure sector, today. BHEL was established more than 40 years ago, ushering in the indigenous Heavy Electrical Equipment industry in India - a dream that has been more than realized with a well-recognized track record of performance. The company has been earning profits continuously since 1971-72 and paying dividends since 1976-77.
INTRODUCTION BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian Economy viz., Power Generation & Transmission, Industry, Transportation, Telecommunication, Renewable Energy, etc. The wide network of BHEL 's 14 manufacturing divisions, four Power Sector regional centres, over 100 project sites, eight service centres and 18 regional offices, enables the Company to promptly serve its customers and provide them with suitable products, systems and services -- efficiently and at competitive prices. The high level of quality & reliability of its products is due to the emphasis on design, engineering and manufacturing to international standards by acquiring and adapting some of the best technologies from leading companies in the world, together with technologies developed in its own R&D centres.
INTRODUCTION BHEL has Installed equipment 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 Powerprojects, Petrochemicals, Refineries, Steel, Aluminum, Fertilizer, Cement plants, etc. Supplied Traction electrics and AC/DC locos to power over 12,000 kms Railway network. Supplied over one million Valves to Power Plants and other Industries.
Established in the late 50’s, Bharat Heavy Electricals Limited (BHEL) is, today, a name to reckon with in the industrial world. It is the largest engineering and manufacturing enterprise of its kind in India and one of the leading international companies in the power field. BHEL offers over 180 products and provides systems and services to meet the needs of core sectors like: power, transmission, industry, transportation, oil & gas, non-conventional energy sources and telecommunication. A wide-spread network comprising 14 manufacturing divisions, 8 service centres, 4 power sector regional centres, 18 regional offices, besides a large number of project sites spread all over India and abroad, enables BHEL to be close to its customers and cater to their specialised needs with total solutions - efficiently and economically. An ISO 9000 certification has given the company international recognition for its commitment towards quality. With an export presence in more than 60 countries, BHEL is truly India’s industrial ambassador to the world. PRODUCT PROFILE
Power Thermal Boilers, STG, Auxiliaries, ESP EPC Hydro Up to 250 MW Turbines, Generators Controls Gas Adv. Class GTs Open Cycle, Combined Cycle Nu clear Nuclear Up to 1000 MWe Power Transmission Switchgear, Transformers, Insulators, Substations, SCADA, HVDC Systems Industry Captive Power Plants Boilers, STGs, Auxiliaries, C&I Systems, DG Transportation Locomotives (electric - AC/DC), Diesel-electrics, EMU's, Traction Electrics Other Products On-Shore Oil Rigs, Compressors, NCES, Desalination Plants, Valves, Motors
The company has 180 products under 30 major product groups that cater to the needs of the core sector like power, industry, transmission, transportation, defence, telecommunications and oil business.
BHEL's ability to acquire modern technology and make it suitable to Indian conditions has been an exceptional strength of the company.
Strong relationship with NTPC is a strength as NTPC is planning a capacity expansion of Rs. 52 bn and based on the past, 85% of NTPC projects have been bagged by BHEL. The company also enjoys purchase price preference.
Huge investment in R&D
Merger & Acquisition – The company has taken over the Management & Control of Bharat Pumps & Compressors Ltd and completely taken over M/s- Bharat Heavy Plate & Vessels Ltd
PSU status is a big weakness for BHEL as it is subject to their rules and regulations and is forced to carry a huge amount of labor force, which it is not able to retrench.
The company offers very stringent credit facilities to the customers and this is a weakness when compared in the face of rising competition. On the other hand their customers in the power segment, have a huge amount of receivables standing against their name in the company's balance sheet. This is a major weakness for the company.
The company is vertically integrated, which could have been avoided by outsourcing its components for power generation and transmission. This could have reduced the cost.
The power sector reforms are expected to pick up in the near future in India, which would directly benefit BHEL.
Increase in defense budget will increase the top line for the company.
NTPC is planning additional capacities to the tune of 2,800 MW, at a cost of Rs 52 bn. BHEL could benefit a lot as it has happened in the past that significant portion of the project of NTPC is handled by BHEL. Nearly 85% of the NTPC projects were assigned to BHEL only
The global trend of consolidation has already resulted in a fall in turnover of the company and this will prove to be a major threat in the years to come as well.
The company is dependent on NTPC to a great extent.
Recently, the government has permitted the import of second hand capital goods that are 10 years old without the need for a license. This move will definitely increase competitive pressures for BHEL.
OBJECTIVES SURVIVAL Existence in the market GROWTH To ensure a steady growth by enhancing the competitiveness edge of BHEL in existing business, new areas, and international operations so as to fulfill national expectations for BHEL. PROFITABILITY To provide a reasonable and adequate returns on capital employed, primarily through improvements in operational efficiency, capacity utilization and productivity, and generate adequate internal resources to finance the company’s growth. GENERAL
OBJECTIVES CUSTOMER FOCUS To build a high degree of customer confidence by providing increased value for his money through international standards of product quality, performance, and superior customer service PEOPLE ORIENTATION To enable each employee to achieve his potential, improve his capabilities, perceive his role and responsibilities and participate and contribute positively to the growth and success of the company. To invest in human resources continuously and be alive to their needs. TECHNOLOGY To achieve technological excellence in operations by development of indigenous technologies and efficient absorption and adaptation of imported technologies to sustain needs and priorities, and provide a competitive advantage to the company. IMAGE To fulfill the expectations which shareholders like government as owners, employees, customers, and the country at large have from BHEL. SHAREHOLDER
NSE n BSE - BHEL Live BSE Quotes Feb 19, 2010 (Close) Price (Rs) 2,354.00 Open (Rs) 2,368.50 High (Rs) 2,389.00 Low (Rs) 2,341.30 % Change -0.83 Volume 65,246 Value (Rs) 153,659,392 52-Week H/L 2,550.00 / 1,294.00 Live NSE Quotes Feb 19, 2010 (Close) Price (Rs) 2,351.15 Open (Rs) 2,360.00 High (Rs) 2,388.70 Low (Rs) 2,341.00 % Change -0.95 Volume 329,496 Value (Rs) 776,035,200 52-Week H/L 2,550.00 / 1,280.00
Recently BHEL came out with the provisional financial results for the FY09. The result was broadly in line of our expectations. The provisional numbers show a top line and bottom line growth of 28.5% YoY and 6.3% YoY respectively. The order inflow has gone up by 18.7% YoY to Rs.502.7 bn for FY09. The management has guided for ~20% top line growth and ~25% bottom line growth for FY10E on the back of strong order book position. The order inflow in FY10E is likely to remain strong at Rs.500bn. FINANCIAL ANALYSIS
The top line grew by 28.5% YoY against our expectation of 27.6% YoY to Rs.275.05bn. While the bottom-line was below our expectation mainly due to provision of Rs.17.28bn for the impending wage revision. The PAT grew by 6.3% YoY to Rs.30.39bn as against our expectation of Rs.33.6bn. Implied Q4FY09 gross sales grew by 32.5% YoY to Rs.105.5bn. Higher provision for impending wage revision dampened the performance for Q4FY09 (P) of the company. Bottom line witness a growth of 12.4% YoY during the quarter to Rs.12.5bn FINANCIAL ANALYSIS
BHEL has an order backlog is Rs1170bn at end of FY09 with an order inflow of Rs.596.8bn during FY09, a growth of 18.7% YoY. The company received orders of worth Rs.130bn in Q4FY09, decline of 5% YoY and 18% QoQ. The management is confident of obtaining orders worth ~Rs.500bn for FY10E FINANCIAL ANALYSIS
BHEL has become the only supplier in the world for 420 kN and 320 kN Porcelain Disc Insulators for application in + 800 kV High Voltage Direct Current (HVDC) Transmission Lines. After exhaustive R&D efforts, BHEL has successfully designed, developed and tested these insulators at STRI, Ludvika, Sweden, the only internationally accredited laboratory equipped for testing of such insulators in the world.
BHEL and Karnataka Power Corporation Limited (KPCL) float JV Company to Build, Own and Operate Thermal Power Plants with Supercritical parameters in Karnataka.
BHEL and Kerala Electrical and Allied Engineering Company Limited (KEL), Govt. of Kerala undertakings have signed a Memorandum of Understanding (MoU) for setting up a Joint Venture (JV).
As part of its manufacturing capacity expansion programme, BHEL is setting up a new manufacturing plant in Tamil Nadu. The new unit is being set up at an initial investment of Rs.2,500 Million and the project will be funded through internal accruals.
Business Outlook and Valuation BHEL has started FY10E on impressive order backlog of Rs.1170bn which is ~4.3x of FY09 revenue. The company witnessed impressive order inflows of Rs.596bn in FY09 and the management remains confident about the order inflow of Rs.500bn in FY10E. We believe the company would continue to perform well in FY10E and would maintain its market share at least for next 2-3 years. We also view BHEL initiative in nuclear power and super critical segment as key positives for future growth. We have introduced FY11E earnings and expect BHEL to report it to grow at a CAGR of 32% over a period of FY09E- 11E which is fairly reflected in the valuation. BHEL currently trades at 17x and 14x on FY10E and FY11E earnings respectively. We recommended the stock on 5th February 2009 post Q3FY09 results with a target price of Rs.1437 and we had mentioned the stock would be fairly valued at this price. The stock has already achieved our target price. Although we remain positive on the long term prospects of the company and considering the order book position we remain confident about its earnings growth as well, but as the stock trades at high multiple of 17x on FY10E we believe the stock is fairly valued at this price and thus we recommend a Reduce with same target price of Rs.1437. FINANCIAL ANALYSIS
BHEL may look into the possibility for bringing changes in working culture to compete its competitors for improving productivity.
Retain energetic and young working force.
It is still rich in grabbing big orders but it must work to fulfill its orders on time. It can outsource the orders from its competitors like ALSTOM, ABB , KIRLOSKER. By doing this it can also fulfill the orders on time