Post-Graduate Program in Software Enterprise Management

                   Indian Institute of Management, Bangalore




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Investments Group Project                                                                                                 ...
Investments Group Project                                                                      Group 15




Industry Analy...
Investments Group Project                                                                                             Grou...
Investments Group Project                                                                      Group 15


315- 335 GW (1 G...
Investments Group Project                                                                      Group 15


The study of the...
Investments Group Project                                                                   Group 15


EXPORT PROMOTION PO...
Investments Group Project                                                                        Group 15


        benchm...
Investments Group Project                                                                              Group 15




<THESE...
Investments Group Project                                                                           Group 15




Ø Thermax...
Investments Group Project                                                                  Group 15



Company Analysis
Bh...
Investments Group Project                                                                 Group 15


each in Lakshadweep. ...
Investments Group Project                                                                  Group 15



Net Profit(+)/Loss(...
Investments Group Project                                                                   Group 15


 Crompton 0.0758441...
Investments Group Project                                                                   Group 15




    •    Except M...
Investments Group Project                                                                         Group 15


Limitations o...
Investments Group Project                                                                Group 15




Reliance Money Repor...
Investments Group Project                                       Group 15




Technical Analysis
                          ...
Investments Group Project               Group 15



Momentum Indicators

Looking at the momentum
indicators – MACD, RSI an...
Investments Group Project                                                                  Group 15



Conclusions from Te...
Investments Group Project                                                                                      Group 15


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Investments Group Project                                                                     Group 15


5-Aug-
    09    ...
Investments Group Project                                                                                                 ...
Investments Group Project                                                                         Group 15


13-Aug-09    ...
Investments Group Project                                                                                                 ...
Investments Group Project                                                                                                 ...
Investments Group Project                                                                        Group 15


2     21.58   ...
Investments Group Project                                           Group 15



References
    •   Reliance Money BHEL Rep...
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Investments Project

  1. 1. Post-Graduate Program in Software Enterprise Management Indian Institute of Management, Bangalore Investments – Q1 2009-10 Prof. M.S. Narasimhan Group Project Submission Analysis and Valuation for Bharat Heavy Electricals Ltd. Submitted by Group – 15 Amit Bhalotia 2008007 Dharmesh Dipak Gandhi 2008019 Swapna Acharla 2007064
  2. 2. Investments Group Project Group 15 Table of Contents Industry Analysis .....................................................................................................................................3 OVERVIEW OF INDIAN CAPITAL GOODS INDUSTRY............................................................................3 PAST & FUTURE PERFORMANCE OF THE INDUSTRY...........................................................................3 INDUSTRY ANALYSIS........................................................................................................................3 INDUSTRY – KEY RATIO ANALYSIS...................................................................................................3 INDUSTRY – COMPARITIVE ANALYSIS .............................................................................................4 Outlook ...............................................................................................................................................5 Competitiveness Analysis of Indian Capital Goods sector ..............................................................5 Business Environment Competitiveness Issues ..................................................................................6 TRADE POLICY ISSUES .....................................................................................................................6 EXPORT PROMOTION POLICY ISSUES .............................................................................................7 INDUSTRIAL STRUCTURE ISSUES.....................................................................................................7 Conclusion from Industry Analysis......................................................................................................8 Company Analysis .................................................................................................................................11 Products & Services ..........................................................................................................................11 Financials...........................................................................................................................................12 Valuation...........................................................................................................................................13 Technical Analysis .................................................................................................................................18 Momentum Indicators ......................................................................................................................19 Conclusions from Technical Analysis ................................................................................................20 Derivatives ............................................................................................................................................21 Futures Analysis ................................................................................................................................21 Options Analysis................................................................................................................................22 Time Variation...............................................................................................................................26 Conclusions .............................................................................................. Error! Bookmark not defined. References ............................................................................................................................................28 Page 2 of 28
  3. 3. Investments Group Project Group 15 Industry Analysis OVERVIEW OF INDIAN CAPITAL GOODS INDUSTRY PAST & FUTURE PERFORMANCE OF THE INDUSTRY For the purpose of this study, BHEL has been classified under the Capital goods industry (defined as product / equipment of high value, durable economic asset life > 3 years, used as plant and machinery for agricultural, industrial and commercial purpose in production / service delivery process). INDUSTRY ANALYSIS Capital goods industry despite sitting on healthy order book undergoes the strains of economic slowdown with lower pace of order execution as well as lower order inflow especially in manufacturing and private sector infrastructure investment. While the lower pace of order execution was pinching the revenue booking of the industry the lower order flow escalates the competition and pressure on margin. On the background the performance of capital goods sector players has been mixed for the quarter ended Jun 2009. The aggregate of other 25 companies forming part of BSE Capital Goods (CG) Index recorded decent 12% rise in revenues to Rs 26866 crore. The operating margin has been flat at 11.5% thus facilitating 12% growth in operating profit to Rs 3088 crore. The growth in PBT was moderated to 6% at Rs 2927 crore. The taxation was lower by 14% to Rs 800 crore, which facilitated relatively better 18% rise in net profit to Rs 2127 crore. The aggregates were powered by powerful show by handful of players led by industry heavy weights of Larsen & Toubro, BHEL and Crompton Greaves. INDUSTRY – KEY RATIO ANALYSIS INDUSTRY AVERAGES 2009 2006 2005 2004 2003 2002 2001 2000 1999 No. of Companies 17 8 9 11 14 11 13 13 9 Key Ratios Debt-Equity Ratio 0.18 0.17 0.19 0.22 0.26 0.35 0.39 0.34 0.35 Long Term Debt-Equity Ratio 0.17 0.15 0.16 0.18 0.21 0.2 0.2 0.21 0.23 Current Ratio 1.53 1.52 1.53 1.58 1.61 1.5 1.39 1.37 1.37 Turnover Ratios Fixed Assets 3.94 3.85 2.98 2.62 2.45 2.41 2.24 2.48 2.72 Inventory 5.48 5.28 5.1 5.02 4.59 4.23 3.76 4.07 4.15 Debtors 2.7 2.62 2.37 2.4 2.15 1.97 1.84 2.08 2.33 Interest Cover Ratio 19.94 23.77 13.98 10.55 7.39 5.48 2.26 4.14 5.88 PBIDTM (%) 16.93 17.24 15.53 14.46 13.99 13.51 8.11 12.56 14.29 PBITM (%) 15.3 15.62 13.5 12.23 11.55 11.18 5.39 10.02 12.05 PBDTM (%) 16.17 16.58 14.56 13.3 12.43 11.47 5.73 10.14 12.24 CPM (%) 11.32 11.56 9.91 9.17 8.12 8.62 5.66 7.22 8.1 APATM (%) 9.69 9.94 7.88 6.95 5.68 6.28 2.94 4.68 5.87 ROCE (%) 34.68 34.87 25.72 21.49 19.15 17.93 8.26 18.08 23.74 Page 3 of 28
  4. 4. Investments Group Project Group 15 RONW (%) 25.99 25.86 17.82 14.69 11.38 12.87 5.93 10.95 15.47 Source: Capitaline INDUSTRY – COMPARITIVE ANALYSIS LARSEN & CROMPTON THERMAX FY09 BHEL TOURBO GREEVES LTD s Mar ' 09 Mar ' 09 Mar ' 09 Mar ' 09 Adjusted EPS (Rs) 45.05 59.59 13.93 32.13 Dividend per share 10.5 15.25 2 5 Operating profit per share (Rs) 70.72 75.75 20.6 41.39 Net operating income per share (Rs) 578.06 399.18 127.64 259.79 Profitability ratios Operating margin (%) 12.23 18.97 16.14 15.93 Gross profit margin (%) 11.39 17.65 15.17 14.89 Net profit margin (%) 10.06 13.87 8.4 9.09 Adjusted cash margin (%) 8.5 15.41 11.76 13.13 Adjusted return on net worth (%) 21.21 27.07 41.6 39.79 Leverage ratios Long term debt / Equity 0.43 0.01 0.04 - Total debt/equity 0.52 0.01 0.04 - Owners fund as % of total source 65.47 99.12 95.81 100 Fixed assets turnover ratio 6.23 4.48 4.25 5.29 Liquidity ratios Current ratio 1.3 1.38 1.32 1.23 Quick ratio 0.96 1.09 1.13 1.01 Inventory turnover ratio 6.01 3.88 17.88 12.2 Payout ratios Dividend payout ratio (net profit) 20.58 30.54 21.59 24.26 Coverage ratios Adjusted cash flow time total debt 2.23 0.02 0.09 - Financial charges coverage ratio 6.35 134.86 28.07 55.04 Component ratios Material cost component (% earnings) 27.51 53.22 66.28 68.29 Selling cost Component 0.92 1.12 4.7 2.86 Exports as percent of total sales 21.7 4.8 24.77 20.82 Import comp. in raw mat. consumed 44.34 27.73 15.74 16.49 Long term assets / total Assets 0.35 0.04 0.26 0.28 Source: Rediff.com The Transmission and Distribution equipment industry especially transformers that has seen aggressive capacity expansion by players resulted in increased supply leading to heightening of competition in the market place. Moreover the competition from Korean and other overseas players has increased with global slowdown on international competitive bidding tenders. This increased competition has resulted in sharp fall in prices of products/ projects affecting T&D equipment manufacturers as well as T&D turnkey project service players. China’s power equipment manufacturers, leveraging their lower costs and shorter delivery periods, have begun hitting Indian majors like BHEL where it hurts most—and are walking away with orders worth thousands of crores of rupees. India plans to add 90,000 MW during the 11th Five- Year Plan ending March 31, 2012. According to one estimate, by McKinsey & Co., India needs Page 4 of 28
  5. 5. Investments Group Project Group 15 315- 335 GW (1 GW=1,000 MW) by 2017 if it has to grow at 8 per cent over the next 10 years. In this background, the market for power equipment has become very lucrative and there’s a lot of action taking place. While Chinese companies have bagged contracts for an estimated 18,000-20,000 MW of equipment to be supplied over the next 8- 10 years, BHEL’s market share actually fell by a little over a percentage point to 63.68 per cent in 2007-08. Few complain about the quality of BHEL’s equipment. But its delivery record is the culprit. The PSU power equipment major is sitting on orders worth Rs 85,500 crore, but is plagued by tardy implementation that is holding back incremental capacity addition. Today, its production lines are stretched and it often ends up paying huge penalties for delays, while the Chinese companies invariably deliver on time. There is, thus, a yawning gap between the demand and supply of electricity generating equipment, and given current trends, this is likely to grow as many more power projects are conceived of and implemented, both in the public and private sectors. Not surprisingly, foreign power equipment suppliers, like ABB (Sweden), Ansaldo (Italy), Doosan (South Korea), Hitachi and Toshiba (Japan) and Power Machines (Russia), are staking out the Indian market. The ground reality is that BHEL, which is struggling with capacity constraints— a function of flawed planning— is hard put to maintain its existing market share of about 65 per cent. It has already lost several large contracts, most notably the Tata promoted ultra mega power projects (UMPP) at Mundra to Japanese rival Toshiba Corporation. A number of private power projects may switch to Chinese suppliers, because their equipment is a lot cheaper; and, more importantly, they deliver in about 30 months. Outlook Capital goods sector is the major sufferer of slowdown in private investment on the back of economic slowdown. Now with improvement in macroeconomic indicators there are signs of positives in most of the key sectors although certain industrial segments continue to face stiff challenges in driving demand. With crude oil prices showing signs of stability/ hardening, renewed interest is expected in oil exploration and production not only in the country but also in Gulf there by giving push for renewal of infrastructure building activity in that region. Indian capital goods sector having greater interest in building infrastructure of Middle East countries are expected to gain if that happens. A new stable government in place also lend confidence among private players to invest especially in infrastructure development such as roads, and power. Though short-term outlook is cloudy the long-term outlook for the sector is good with renewal of private investment to back up the public sector spending in the country as well as infrastructure build up in overseas markets Competitiveness Analysis of Indian Capital Goods sector Page 5 of 28
  6. 6. Investments Group Project Group 15 The study of the performance of the Capital Goods sector reveals that its fortunes are inextricably linked with that of the overall Indian industry. High degree of correlation between the performances of the two sectors is further accentuated by high elasticity of Capital Goods industry to changes in industry growth. The Capital Goods value added contributes a fairly constant proportion (9-12%) of the total manufacturing value added, thus establishing that manufacturing as the key end-user sector of Capital Goods drives the performance of the latter. Another key determinant of the demand for Capital Goods is the gross investment undertaken in the economy. The apparent consumption of Capital Goods constitutes a constant share (17-21 %) of the total Gross Domestic Investment in the country. On the supply side the output of Capital Goods is determined by investments in Capital Goods sector and capacity utilization. The investments in the Capital Goods sector have declined with the decline in the relative profitability of the Capital Goods sector with respect to other sectors. The export performance corroborates the inward focus of Capital Goods industry as less than one-tenth of its sales is directed to exports. Business Environment Competitiveness Issues TRADE POLICY ISSUES The raw materials used are largely domestic in origin. With the dismantling of various price controls on key inputs, Indian Capital Goods manufacturers now procure raw materials at market prices, which move in line with international prices. The raw material price indices have risen faster than the machinery price index. It is difficult for the Indian Capital Goods manufacturers to pass on the rise in prices to the customers, thereby impacting their profitability. However the rising cost of raw materials has prodded only a few Indian manufacturers to resort to value engineering techniques for efficient raw material usage and cost reduction. The quality of raw materials is also not up to the international standards in terms of dimensional tolerances and metallurgical properties, and this, in turn, affects the quality of the final product. There is comparatively high incidence of indirect taxation (excise duty, octroi duty/entry tax, Merit duty, central sales tax, sales tax, service tax etc.) in the case of the Indian Capital Goods sector when compared to taxes faced by Capital Goods sectors of other nations. Imposition of surfeit of taxes on Capital Goods sector increases the final price to the end consumer, thereby stifling demand. The cost disadvantage due to indirect taxes to Indian Capital Goods manufacturers can be as high as 24 percent in certain cases. Combining above cost disadvantages with the high cost of finance and infrastructure inadequacies, the domestic Capital Goods producers suffer from an overall cost disadvantage upto 34 per cent against the imports. Inversion of duty structure (higher import duty on select raw materials like copper, rubber components etc. compared to that of finished Capital goods import) results in a reduced effective protection rate for the electrical segment as a whole. Zero-duty imports for projects like refinery, fertilizer etc. puts the domestic Capital Goods industry at a clear disadvantage. The purchase preference in favour of public sector enterprises results in distortion of the market mechanism. It deprives the private sector firms of a level playing field and also erodes the profitability of the public sector enterprise. Page 6 of 28
  7. 7. Investments Group Project Group 15 EXPORT PROMOTION POLICY ISSUES Export transaction costs for Indian Capital Goods industry are among the highest in the world. Heavy transaction costs not only increase the price of the final export product, but also result in inordinate delays in export fulfilment, thus affecting export competitiveness. According to available studies, total cost of transaction of engineering goods in India works to around 10 per cent of the total export earnings. It is further estimated that if the procedural complexities were eliminated, then the export sales of Indian Capital Goods is likely to go up significantly (by 28 per cent as per Exim Bank estimates) Indian Capital Goods industry also lags in strong institutional mechanisms for export credit and promotion. Credit periods in international markets ranges from 90 to 360 days at interest terms varying from 0.25 to 4 per cent with 1 to 3 years moratorium. In India the interest rates vary from 6.5 to 10 per cent. The Export–Import Bank today raises money at commercial rates from the market and is unable to offer competitive rates Indian firms, in general, lack export thrust in their marketing strategies. The emergence of global market, through lowering of tariff barriers, has led to blurring of margins between domestic and export markets. Very few Indian firms have a global mindset. The focus is largely on the domestic market; exports gain importance only in case of fall in domestic demand INDUSTRIAL STRUCTURE ISSUES The ownership pattern in Indian Capital Goods Industry is marked by the dominance of Public Sector Enterprises (PSEs) in heavy engineering, machine tools, boiler manufacturing, while private firms prevail in industrial machinery segments such as cement, sugar and most other non-electrical machinery. The impending privatization of these large PSEs would radically change the industry structure. The firm structures and their ownership pattern at the end of the privatization process would significantly affect the development of this sector in the future. Indian Capital Goods manufacturers have working capital requirements as high as 45 per cent of net sales (against global benchmark of 15 per cent). High interest rate regime in India results in a substantial 7 to 8 per cent interest rate differential relative to the reference countries, amounting to 3.1 - 3.6 % capital cost disadvantage due to interest differential and 0.9 per cent due to higher working capital requirement. The quality of infrastructure (transport, communication and power) is poor, thus affecting competitive delivery schedules and increasing operating costs. The delivery time of locally made Capital Goods in many cases is 1.5 to 2 times longer than in industrialized nations. Companies tend to lose orders on delivery schedules. Inland transport is slow, although the railroad density is among the highest in the world. The cost of electric power is comparable to that in other nations, but the reliability is poor. Many Indian Capital Goods firms have set up their own captive power plants to obviate the problem. This has added to the costs. Overall the infrastructure inadequacies are estimated to translate into 5 per cent cost disadvantage for Indian Capital Goods manufacturers’ vis-à-vis foreign manufacturers. Indian Capital Goods sector is characterized by a large width of products (almost all major Capital Goods are domestically manufactured) - a legacy of import-substitution policy. This is reflected in the import and export weights calculated for the various reference and Page 7 of 28
  8. 8. Investments Group Project Group 15 benchmark countries. Low values for both weights would indicate an inward oriented economy focused on catering only to its demand through domestic production. In the case of India, the import weight works to 21 percent, while the export weight is 7 percent. A case in point is the vibrant German Capital Goods sector, which has an import weight of 32 percent and export weight of 41 percent with a self-sufficiency of 115 percent. Even nations with advanced Capital Goods sector do not produce the entire range of Capital Goods, but instead focus on select segments or sub segments. The Indian Capital Goods sector, on the other hand, lacks sufficient depth largely due to low demand sophistication of the Indian market, thus, resulting in comparatively low competitiveness. The case on hand, BHEL, has been making equipment of assorted sizes and specifications because of lack of other orders. Its ability to deliver was hampered by such customized orders and the absence of bulk orders. If it standardizes its specifications and sizes, like Chinese do, it can easily ramp up its capacity Conclusion from Industry Analysis Investors, however, remain divided about BHEL’s long-term prospects: While accounting for the slowdown in fresh investments on capacity creation, it is noted that BHEL has a strong order book and that should stand it in good stead. However, with the larger part of orders from central and state utilities completed, the private sector is likely to dominate going ahead. These players prefer Chinese manufacturers, which promise better delivery terms (28 months) and quote 25 per cent lower prices. So, retaining market share might prove to be difficult for BHEL Capital goods showed a spectacular performance with 11.8% growth compared to 7.8% growth in Jun’08. In Apr-Jun’09 they declined to 1.0% compared to 7.9% growth in the previous period <Swapna ---- what is the conclusion of the industry analysis ? what is the learning from it for company analysis? ADD Appropriate FOOTNOTES> <DO WE NEED THIS?> Page 8 of 28
  9. 9. Investments Group Project Group 15 <THESE ARE SOME POINTS I HAVE COME ACROSS, SHALL I GO AHEAD & SUBSTANTIATE THEM WITH DATA?> BHEL outsmarts all the other players as its COGS to sales % and selling and distribution expenses as a % of sales stands very low in comparison to other companies. BHEL is again the best in terms of EBITDA as % of sales. BHEL’s operating expenses has been well managed over the years and hence its EBIT is better than its competitors, closely followed by L&T. ØBHEL’s fixed asset has been the lowest which shows less money is tied in fixed asset as compared to others. C&G inventory has increased in the last year as compared to the other players and this can be a matter of concern for the company Thermax and BHEL’s net worth has decreased over the years due to use of more and more of their reserves and surplus to fund their capital requirement. BHEL and Thermax are using internal sources of financing to fund their capital requirement and so their total borrowings is less whereas L&T and C&G are using debt to use financial leverage ØBHEL’s ROE has been better than other players over the years but finally all are on the same platform. Thermax has bettered all other companies due to smaller asset base and greater revenues from its operations. At the end, it is BHEL which has outsmarted others due to less COGS and S&G expenses as compared. ØC&G has managed its current ratio near to the industry average over the years which shows its ability to manage its current assets and liabilities better. Besides that, other players have also maintained better current ratio. The smaller players, Thermax and C&G have been managing their inventory efficiently and it is above the industry average Average receivables period is very high for BHEL and L&T, but they have one respite that their payables period is also very high. Thermax has been doing well in this case. BHEL seems to be not managing its inventory properly as its average payables period is less than the average receivables period and other players are having both things to be almost equal Page 9 of 28
  10. 10. Investments Group Project Group 15 Ø Thermax might have some liquidity problem as its quick ratio is way below the industry average. Other players are more or less comfortable in this field. BHEL and Thermax are having almost zero debt and this shows that they are not using leverage to maximize their profit. L&T seems to be optimally leveraged. It shows that Thermax and C&G are having good demand for their products. BHEL needs to manage its debtors a bit more efficiently as it is way below the industry average. L&T and BHEL have higher EPS as they are established players in the sector and so their earnings have been higher over the years. Thermax and C&G are commanding higher P/E ratios as their future growth potential has been really high due to their efficient management of resources and good demand for their products Page 10 of 28
  11. 11. Investments Group Project Group 15 Company Analysis Bharat Heavy Electricals Limited (BHEL) is one of the largest engineering enterprises of its kind in India. BHEL is the largest domestic capital goods manufacturer in India and the 12th largest in the world. The international competitors of BHEL are General Electric, Siemens, Alsthom and ABB. BHEL offers a wide spectrum of equipment, systems and services in the field of power, transmission, industry, transportation, oil & gas, non-conventional energy sources and telecommunication. Power constitutes 52.5 per cent of its business. The company has 14 manufacturing divisions, 8 service centers and 4 power sector regional centers. Its first plant was set up at Bhopal in 1956 under technical collaboration with AEI, UK followed by three more major plants at Hardwar, Hyderabad and Tiruchirapalli with Russian and Czechoslovak assistance. Products & Services BHEL manufactures over 200 products under 30 major product groups. The company has installed equipment for over 64,000 mw of power generation for utilities, captive and industrial users. Its strengths are comparable product range and cost competitiveness with foreign manufacturers. The company enjoys a crucial advantage of depreciated assets. The company is cost-competitive when it comes to power plant equipment and has bagged a number of power project orders placed in India against open international competitive bidding. The company has joint venture with Siemens for servicing old Indian fossil fuel power plants and with GE for designing of heavy-duty gas turbines. A thirty-two thermal power stations equipped with Bhel’s generating sets have been given productivity awards by the power ministry. Of these power stations, eight have received gold medals. The awards have been given for meritorious and efficient performance based on account of reduced inputs. Bharat Heavy Electricals is mulling to pick up equity stake or even buy out forgings ventures in Eastern Europe and China. BHEL’s chairman and managing director, K Ravi Kumar said the company was looking at a Romanian firm and others in East Europe. He also said that Chinese firms are also being looked at. He further said that the company was also keeping its options open on the idea of picking up stake in the proposed Areva-Bharat Forge forgings venture. By adopting this strategy, BHEL aims at blocking some capacity to tide over a shortage of forgings and casting being faced by the company. Company announced an investment of Rs 120 billion over the next four years to pick up equity in power projects and to boost its capacity to support the generation of about 20,000 MW. The company said that funding will come from internal accruals as BHEL is a cash-rich company. BHEL’s current manufacturing capacity can support power generation of 10,000 MW. It includes 2,500 MW of hydro electricity production, and 500 MW captive power plants for the industrial sector. A thousand MW is exported and the power plants coming up can generate 6,000 MW. By the end of this fiscal, the company hopes to make equipment for generating 15,000 MW. As part of India’s largest solar power-based island electrification project in india, Bharat Heavy Electricals (BHEL) has successfully commissioned two grid-interactive solar power plants of 100 KWp Page 11 of 28
  12. 12. Investments Group Project Group 15 each in Lakshadweep. With this, the company has commissioned a total of eleven solar power plants in the Lakshadweep islands, adding over 1 MW of solar power to the power generating capacity of the coral islands in the Arabian Sea. The plants have been set up at Chetlat and Amini islands of Lakshadweep. BHEL has earlier commissioned solar power plants of various ratings up to 150 KWp at the islands of Agatti, Andrott, Bangaram, Bitra, Kadmat, Kalpeni, Kavaratti, Kiltan and Minicoy. Bharat Heavy Electricals (BHEL) has achieved yet another milestone in the Middle East region with a prestigious export order for two gas turbine generating units of 126 MW each from the Sultanate of Oman. Valued at Rs 3,750 million, the order envisages supply and supervision of erection and commissioning of two numbers state-of-the-art gas turbine generating units of 126 MW each for a power project being set up by Petroleum Development Oman (PDO) at Amal, nearly 700 kms from Muscat. Company has secured prestigious contract worth Rs 40.15 billion (USD 845 million) from Hindalco Industries. The order is for the supply and erection of the main plant package for its upcoming captive power plant (6x150 MW) at Aditya Aluminium in Sambalpur district of Orissa. The order comes close on the heels of an order placed on BHEL by Hindalco recently for a similar boiler and turbine generator package for its captive power plant at Mahan Aluminium in Singrauli district of Madhya Pradesh Financials Annual results for FY2008-09 Amount(Rs. in Description lakhs) Net Sales/Income from Operations 2623419.00 Other Operating Income 62444.00 Increase/Decrease in Stock in trade and work in progress -115154.00 Consumption of Raw Materials 1712039.00 Employees Cost 411279.00 Depreciation 33427.00 Other Expenditure 235114.00 Total Expenditure 2276705.00 Profit from Operations before Other Income, Interest & Exceptional Items 409158.00 Other Income 78798.00 Profit before Interest & Exceptional Items 487956.00 Interest 3071.00 Profit after Interest but before Exceptional Items 484885.00 Profit(+)/Loss(-) from Ordinary Activities before tax 484885.00 Tax Expense 171064.00 Page 12 of 28
  13. 13. Investments Group Project Group 15 Net Profit(+)/Loss(-) from Ordinary Activities after tax 313821.00 Extraordinary Items - Net Profit (+) / Loss (-) for the period 313821.00 Dividend (%) 170 Face Value (in Rs.) 10.00 Paid-up Equity Share Capital 48952.00 Reserves excluding Revaluation Reserves 1244929.00 Basic EPS before Extraordinary items (in Rs.) 64.11 Diluted EPS before Extraordinary items (in Rs.) 64.11 Basic EPS after Extraordinary items (in Rs.) 64.11 Diluted EPS after Extraordinary items (in Rs.) 64.11 Public Shareholding (Number of Shares) 158009600.00 Public Shareholding (%) 32.28 Promoter & Promoter group Number of Shares Non-encumbered 331510400.00 Promoter & Promoter group Shares Non-encumbered (as a % of total shareholding of 100.00 Promoter and Promoter Group) Promoter & Promoter group Shares Non-encumbered (as a % total share capital of 67.72 the company) Valuation At current market price, stock is trading at 22.68 P/E multiple of its FY2010 estimated earnings. We recommend investors to buy “BHEL” with medium to long term investment horizon. Valuation Model (all calculations based on 2008 annual reports) • Multi-Stage growth model • Revenue Projection from 2007-08 annual report and 11th 5 year plan projections • Cost model from historical data and its dependence on revenue by regression • Verification of the cost model by looking at R2 value • Historical dividend policy. • Terminal distribution of surplus reserves as dividend. • At the end a stable growth • Discount rate estimated by CAPM on industry • Rf taken as 90-day t-bill of RBI • Rm taken as market return since 2001 • β of industry taken . Calculations shown below. Company Beta equity Debt/Equity MktCap Beta assets ALSTOM 0.170695078 0 3,443.15 0.170695078 BHEL 0.546713639 0.01 107,758.00 0.541300633 Page 13 of 28
  14. 14. Investments Group Project Group 15 Crompton 0.07584418 0.04 10,347.71 0.072927096 Amaraja 0.051710637 0.7 979.97 0.030418022 Beta asset avg 0.487245651 Debt/Equity 0.017771062 Beta equity industry 0.495904523 2001 Rm 21.10% onwards Rf 4.5842% Re 12.78% From the annual report the • Capacity will go up from 10000 MW to 15000 MW in 2009.This will further go up to 20000 MW in 2012. • Looking at the huge order backlog and revenue visibility it is apparent that capacity is the bottleneck here. • The revenue is expected to double by 2013 looking at the doubling of the capacity. This is in line with the eleventh plan. • A total of 4200 crore capital investment in the process. • The investment is assumed to be put equally in 4 years from 2009 to 2012. • The depreciation is calculated and is retired over a period of 10 years. Using straight line method. Cost Item Intercept X-variable R2 Raw Materials -548.14 0.5332 0.99 Power & Fuel Cost 145.23 0.0066 0.96 Employee Cost 1032.81 0.0750 0.57 Other Manufacturing 74.05 0.0987 0.98 Expenses Selling and Administration -88.75 0.0461 0.86 Expenses Miscellaneous 626.56 0.0000 0.01 Expenses Page 14 of 28
  15. 15. Investments Group Project Group 15 • Except Misc expenses all others are linearly correlated. Since misc expenses don’t have much of a linear relation with net sales, they are assumed to be constant at the 2008 value. • The investments are assumed to be invested in some liquid mutual funds (7%) that would earn something above the t-bill rate. • The growth rate till 2012 is assumed to be 25%. It is then expected to drop a little to 15% before stabilizing to 10% growth. • Post the 15th year stable growth rate model is applied. Ratios Fixed Asset Turnover Ratio 18.74 Inventory/Sales 0.29 Receivable/Sales 0.62 Current Liabilities/Expenses 1.00 Dividend Payout Ratio 0.26 Cost of Equity 12.78% Present value of 10 year Dividend 216 Present value of 11-15 year Dividend 122 16-inf 2041 Residual Value 436 Total Value 2815 Market Price (as of July 2nd 2008) 2056.55 Book Value as on March 2008 220.1 EPS as on March 2008 55.82 Price - Earning Ration as on July 2, 2008 36.84 Interest on investments 7% Recommendation BUY Page 15 of 28
  16. 16. Investments Group Project Group 15 Limitations of the model: Sensitive to the stable growth rate chosen. Small variations in the terminal growth rate lead to large variations in the estimates of price. Alternative Valuation Model Based on PEG ratio: This is taking price as on 2nd July, 2008 Growth rate for next 3 PEG Recommendation for July 2, PEG ratio as on 2nd July,2008 years Ratio 2008 At expected growth rate for next 25 1.47 SELL 3 years PEG of 1 is typically fairly valued 20 1.84 SELL 15 2.46 SELL As on 21st Aug 2009 PE ratio(for earnings PEG ratio at 30% PEG ratio at 25% 2009) growth growth 52 wk Low 984 13.81548262 0.460516087 0.552619305 52 wk High 2405 33.76649969 1.12554999 1.350659988 Current price(as on 21st 2297 32.26139833 1.075379944 1.290455933 Aug,2009) .8 Based on Reliance Money analyst report (Based on 2009 earnings and 2010, 2011 estimated earnings) Comparison FY11 forward PE multiple Industry 22 BHEL 19.02129617 Recommendation BUY as on 21st Aug 2009 Page 16 of 28
  17. 17. Investments Group Project Group 15 Reliance Money Report and calculations Year 2008 2009 2010 2011 Net Sales 193046.4 248,645.90 314,636.60 385,115.20 %Growth 12% 28.80% 26.50% 22.40% EBIDTA 33191.8 40,259.80 58,552.30 73,347.30 %Growth 2.80% 21.30% 45.40% 25.30% Other Income 14447.6 8,609.30 10,639.60 12,921.30 Interest 354.2 412.9 517.1 611.2 Dep 2972.1 3,163.80 4,975.70 5,531.00 PBT 44313.1 45,292.30 63,699.10 80,126.40 %Growth 18.60% 2.20% 40.60% 25.8 Tax 19,620.50 15,852.30 22,294.70 28,044.20 Deferred tax -4027.7 -951.1 -1,274.00 -1,602.50 Adj PAT 28,720.30 30,391.10 42,678.40 53,684.70 %Growth 18.4 6.30% 40.40% 25.80% Extraordinary -17.2 Reported PAT 28,703.10 30,391.10 42,678.40 53,684.70 %Growth 18.4 6.20% 40.40% 25.80% Div% 152.5 245 250 270 EPS 58.4 62.1 87.2 109.7 BVPS 220.1 268 341.1 81.1 Dividend 7465.18 11993.24 12238 13217.04 Equity Cap 4,895.20 4,895.20 4,895.20 4,895.20 Reserves 102,846.90 126,313.10 162,066.60 208,826.40 Net Worth 107,742.10 131,208.30 166,961.80 213,721.60 Unsecured Loans 951.8 900.8 900.8 900.8 Total Loans 951.8 900.8 900.8 900.8 Total Liability 108,693.90 132,109.10 167,862.60 214,622.40 Net Block 16,392.90 26,835.50 28,298.00 31,126.20 Investments 82.9 82.9 82.9 82.9 Deferred Tax Assets 13,379.30 12,428.20 11,154.20 9,551.70 Inventory 57,364.00 71,934.80 88,084.20 105,984.80 Debtors 119,748.70 169,217.40 193,151.90 229,999.30 Cash Balance 83,860.20 83,923.50 133,257.80 182,969.80 Other CA 16,074.30 13,405.70 13,405.70 13,405.70 Current Liabilities 165,764.50 205,471.40 257,481.20 313,468.60 Provisions 32,443.90 40,247.40 42,090.80 45,029.30 NCA 78,838.80 92,762.60 128,327.60 173,861.60 Total Assets 108,693.90 132,109.10 167,862.60 214,622.40 Dividend growth rate 60.66% 2.04% 8.00% Page 17 of 28
  18. 18. Investments Group Project Group 15 Technical Analysis Yahoo Finance & iCharts.in were used to generate the technical charts for BHEL. From the 10 year and 5 year charts, we observe that the company saw huge growth from 2001 to mid-2006; and since then it has been trading in a band (with support line trending downwards). This is explained by the increase in order book backlog since 2006. To further analyse we took the 1 yr chart which looks almost horizontal. The price has traded below 50-day MA up to Mar’09 and then has been trading slightly above 50-day MA. This is possibly explained by the overall market turnaround in Mar’09 and the stock price has gone up on market momentum. Page 18 of 28
  19. 19. Investments Group Project Group 15 Momentum Indicators Looking at the momentum indicators – MACD, RSI and MFI; we find that MACD, MFI & RSI are positively correlated. No deviations in the money flow vs the convergence-divergence indicator shows that volume have been supportive of the price trends. Page 19 of 28
  20. 20. Investments Group Project Group 15 Conclusions from Technical Analysis • The charts indicate the BHEL has been trading in a band from 1200 to 2200 for more than 3 years. The price movements are in line with market momentum most of the time. In absence of any break-outs or fundamental change in the company’s operations, a trading strategy based on technical charts can be developed - buy on every oversold indication and sell on every overbought indication from MACD and MFI indicators. • As discussed in the company analysis, BHEL is going to add capacity in Dec 2009 and then again in 2011-12. An early indication of this will show up in the charts with increase in volume and price. Also, the MFI will indicate large money moving in, before the results for Dec’09 quarter is out. This will be a good point to buy and hold for a long term, as it will probably cause a breakout. Page 20 of 28
  21. 21. Investments Group Project Group 15 Derivatives Futures Analysis Expiry on 27th Aug 2009 Process • Look at the theoretical futures prices and its deviation from the actual prices. • Look at the cost of carry numbers =+ve/-ve • Look at the Open Interest numbers and see if they tell a story. Daily Theoretic spot al Deviation Futures Change in Spot Differe price futures From theoretical Increase/dec Trend cost of Date Price OI % Price nce return price price(%) rease Reversal carry 1-Jul- 09 2223 8.99% 2214.5 8.5 2231.2 -0.37% 8.5 2-Jul- 2153.5 09 2150 4.30% 5 -3.55 -2.75% 2169.5 -0.90% 0 -3.55 3-Jul- 09 2190.1 13.89% 2186.3 3.8 1.52% 2202.2 -0.55% 1 YES 3.8 6-Jul- 09 2073.25 1.82% 2100.5 -27.25 -3.92% 2115.0 -1.97% 0 YES -27.25 7-Jul- 09 2145 3.51% 2132.7 12.3 1.53% 2147.1 -0.10% 1 YES 12.3 8-Jul- 09 2043.25 5.00% 2047.9 -4.65 -3.98% 2061.5 -0.88% 0 YES -4.65 9-Jul- 2022.2 09 2015.3 8.40% 5 -6.95 -1.25% 2035.4 -0.99% 0 NO -6.95 10-Jul- 1985.9 09 1973.7 18.63% 5 -12.25 -1.80% 1998.6 -1.24% 0 NO -12.25 13-Jul- 1959.7 09 1957.75 4.17% 5 -2 -1.32% 1971.4 -0.69% 0 NO -2 14-Jul- 2047.5 09 2045.8 11.11% 5 -1.75 4.48% 2059.5 -0.66% 1 YES -1.75 15-Jul- 09 2172.1 2.58% 2187.2 -15.1 6.82% 2199.7 -1.25% 1 NO -15.1 16-Jul- 2200.4 09 2187.35 10.19% 5 -13.1 0.61% 2212.7 -1.15% 1 NO -13.1 17-Jul- 09 2228.65 -5.88% 2227.2 1.45 1.22% 2239.3 -0.48% 1 NO 1.45 20-Jul- 09 2277 93.12% 2276.6 0.4 2.22% 2288.1 -0.48% 1 NO 0.4 21-Jul- 09 2212.4 48.90% 2213.6 -1.2 -2.77% 2224.4 -0.54% 0 YES -1.2 22-Jul- 2146.6 09 2148.2 0.46% 5 1.55 -3.02% 2156.9 -0.40% 0 NO 1.55 23-Jul- 09 2175.2 4.74% 2168.2 7 1.00% 2178.2 -0.14% 1 YES 7 24-Jul- 2210.6 09 2208.85 6.42% 5 -1.8 1.96% 2220.6 -0.53% 1 NO -1.8 27-Jul- 09 2261.6 6.68% 2260.8 0.8 2.27% 2270.1 -0.37% 1 NO 0.8 28-Jul- 2263.5 09 2270.15 11.09% 5 6.6 0.12% 2272.5 -0.10% 1 NO 6.6 29-Jul- 09 2248.4 15.53% 2239.3 9.1 -1.07% 2247.9 0.02% 0 YES 9.1 30-Jul- 09 2210.9 15.79% 2200.8 10.1 -1.72% 2209.0 0.09% 0 NO 10.1 31-Jul- 09 2234.85 -1.34% 2230.3 4.55 1.34% 2238.3 -0.15% 1 YES 4.55 3-Aug- 2346.6 09 2351.55 -1.18% 5 4.9 5.22% 2354.1 -0.11% 1 NO 4.9 4-Aug- 2331.3 09 2335.5 -9.13% 5 4.15 -0.65% 2338.4 -0.13% 0 YES 4.15 Page 21 of 28
  22. 22. Investments Group Project Group 15 5-Aug- 09 2318.7 0.88% 2309.9 8.8 -0.92% 2316.6 0.09% 0 NO 8.8 6-Aug- 09 2272.3 -3.64% 2273.2 -0.9 -1.59% 2279.5 -0.32% 0 NO -0.9 7-Aug- 09 2182.9 2.66% 2183.2 -0.3 -3.96% 2189.0 -0.28% 0 NO -0.3 10- Aug-09 2146.15 -0.55% 2148.5 -2.35 -1.59% 2153.3 -0.33% 0 NO -2.35 11- 2147.4 Aug-09 2145.8 -3.04% 5 -1.65 -0.05% 2152.0 -0.29% 0 NO -1.65 Cost of carry oscillates between positive and negative sides. So spot and futures should be treated as 2 different markets. Negative cost of carry does exist but any arbitrage opportunity will be erased by transaction costs and taxes. Open Interest change and price trends do not seem to give any pattern to have any correlation. Maybe some more analysis is required. Options Analysis Process • Analyze the variation of option prices with the underlying stock prices • Look at the theoretical option pricing based on risk-free rate and historical annualized volatility and examine the difference • Look at the implied volatility based on the option price. • Do this for ITM, OTM call and put option which is decided as on 11th Aug,2009 Current Market Price(as on 11th Aug,2009) 2147 Interest Rate 5% Expiry Date 8/27/2009 Div Yield 0% OTM Call Strike Price 2160 Theoretical Call Value 109.0267 Theoretical Put Value 87.62995 Actual Call Value 74.4 Current Date 8/11/2009 DTE 16 Years 0.043836 Implied Call Volatility 43.69% Historical Volatility 0.63 Implied Put Volatility 42.90% OTM Put Strike Price 2100 Actual Put Value 52.95 ITM call strike price 2100 ITM Put Strike price 2200 Deep ITM call strike price 1900 Deep ITM put strike price 2400 Final implied Volatility (based on 11th Aug, pricing) 43% Page 22 of 28
  23. 23. Investments Group Project Group 15 OTM Call Option at 2160 Theoretical value at Open Int Date Underlying price Call at 2160 Theoretical value implied volatility Difference Implied Call Volatility 150 3-Aug-09 2346.65 119.7 261.3747654 224.0332809 -104.3333 0.004% 150 4-Aug-09 2331.35 119.7 247.4520088 210.1616256 -90.46163 0.004% 150 5-Aug-09 2309.9 119.7 229.2770602 191.7078295 -72.00783 0.004% 150 6-Aug-09 2273.2 119.7 201.0905789 162.5536194 -42.85362 12.127% 300000 7-Aug-09 2183.2 94.15 142.3022632 102.1096946 -7.959695 39.028% 300750 10-Aug-09 2148.5 75 113.2179646 76.23906465 -1.239065 42.332% 300900 11-Aug-09 2147.45 74.4 109.0749512 73.21060433 1.189396 43.667% 301050 12-Aug-09 2159.2 70.2 111.4934474 76.64967366 -6.449674 39.303% 300600 13-Aug-09 2225.6 92.75 145.9973477 113.4218587 -20.67186 29.613% 300600 14-Aug-09 2200.6 92.75 126.8258973 94.75348234 -2.003482 41.737% 300600 17-Aug-09 2181.25 71.75 102.6873871 74.3010344 -2.551034 41.195% 300600 18-Aug-09 2246.85 71.75 138.7121878 114.3336464 -42.58365 0.004% 300600 19-Aug-09 2214.85 71.75 112.9871153 88.61798624 -16.86799 28.149% 300300 20-Aug-09 2253.75 100 133.8615913 113.5249231 -13.52492 25.898% 300300 21-Aug-09 2301.8 130 165.1910313 150.7981669 -20.79817 0.004% 300300 24-Aug-09 2343.8 130 188.9577607 185.1730884 -55.17309 0.004% 300300 25-Aug-09 2303.5 130 147.9859379 144.5999616 -14.59996 0.004% 300300 26-Aug-09 2298.6 130 139.7048955 138.9133832 -8.913383 0.004% As is evident from the above, only when the liquidity in terms of open interest increased did we see the actual and theoretical prices(based on implied call volatility from 11th Aug price) converge. The difference in implied call volatility suggests that the option pricing varies a lot with the volatility number put in the model. This should depend on the expectations of the market at that particular point of time and would keep varying with each day. So one number based on historical volatility would not give the correct option price. ITM Call Option at 2100 Call Theoretical value Implied Date Underlying price at 2100 Theoretical value at implied volatility Difference Call Volatility Open Int 3-Aug-09 2346.65 131 303.5098803 272.0068753 -141.0069 0.004% 1200 4-Aug-09 2331.35 131 289.0274437 257.4451087 -126.4451 0.004% 1200 5-Aug-09 2309.9 131 269.8920818 237.7930455 -106.793 0.004% 1200 6-Aug-09 2273.2 131 239.6950756 206.0490319 -75.04903 0.004% 1200 7-Aug-09 2183.2 131 174.8629498 137.2291292 -6.229129 39.577% 1200 10-Aug-09 2148.5 131 143.4295701 107.8424972 23.1575 56.049% 1200 11-Aug-09 2147.45 131 139.2860326 104.7736527 26.22635 58.224% 1200 12-Aug-09 2159.2 96.7 142.8132206 109.7851662 -13.08517 34.824% 900 Page 23 of 28
  24. 24. Investments Group Project Group 15 13-Aug-09 2225.6 96.7 183.1890683 154.7980619 -58.09806 0.004% 900 14-Aug-09 2200.6 96.7 162.1851652 133.5682736 -36.86827 0.004% 900 17-Aug-09 2181.25 96.7 137.1095404 111.6600515 -14.96005 29.827% 900 18-Aug-09 2246.85 96.7 180.1627955 161.0212818 -64.32128 0.004% 900 19-Aug-09 2214.85 96.7 151.8707901 131.9835872 -35.28359 0.004% 900 20-Aug-09 2253.75 96.7 177.596322 162.8368268 -66.13683 0.004% 900 21-Aug-09 2301.8 96.7 214.5047261 205.7175438 -109.0175 0.004% 900 24-Aug-09 2343.8 96.7 245.8861828 244.6504215 -147.9504 0.004% 900 25-Aug-09 2303.5 96.7 204.9241973 204.0631084 -107.3631 0.004% 900 26-Aug-09 2298.6 96.7 198.929913 198.863813 -102.1638 0.004% 900 Again we see a huge difference in the pricing, mainly due to very less liquidity. Page 24 of 28
  25. 25. Investments Group Project Group 15 OTM Put Option at 2100 Theoretical value at Implied Date Underlying price Put at 2100 Theoretical value implied volatility Difference Put Volatility Open Interest 3-Aug-09 2346.65 57.55 50.54522901 30.88821095 26.66179 66.921% 300 4-Aug-09 2331.35 57.55 51.62552337 32.58679322 24.96321 66.341% 300 5-Aug-09 2309.9 57.55 54.20292543 35.85326861 21.69673 64.892% 300 6-Aug-09 2273.2 57.55 60.9687161 43.66936395 13.88064 61.092% 300 7-Aug-09 2183.2 41.5 86.39942026 73.49577845 -31.9958 39.005% 300 10-Aug-09 2148.5 56 90.45472812 83.13637004 -27.1364 43.644% 300 11-Aug-09 2147.45 51.1 87.62415251 81.42838475 -30.3284 41.821% 300 12-Aug-09 2159.2 51.1 79.66433531 73.38796307 -22.288 45.742% 300 13-Aug-09 2225.6 24.5 53.90321084 44.03069106 -19.5307 42.225% 300 14-Aug-09 2200.6 23.9 58.16236862 50.63289156 -26.7329 38.746% 450 17-Aug-09 2181.25 34.9 53.22612449 50.34237799 -15.4424 48.771% 2400 18-Aug-09 2246.85 11.9 30.94257243 25.04570271 -13.1457 43.125% 3300 19-Aug-09 2214.85 10 34.91379299 31.60078924 -21.6008 36.976% 3900 20-Aug-09 2253.75 3.1 22.00258389 17.87850674 -14.7785 34.595% 3750 21-Aug-09 2301.8 2 11.12427999 7.372565227 -5.37257 41.721% 3750 24-Aug-09 2343.8 2 1.295811014 0.560134618 1.439865 67.921% 3750 25-Aug-09 2303.5 2 0.897249725 0.557958367 1.442042 72.399% 3750 26-Aug-09 2298.6 2 0.066422724 0.042364629 1.957635 100.391% 3750 Again the difference in theoretical valuation based on implied volatility and the actual prices show a divergence. The implied volatility number seems to vary a lot indicating a lot of uncertainty in the market. Let’s look at what difference the variation in price has on option prices and the corresponding delta, gamma indicators Put Value at implied Variation Underl Theoretic Call Value at Theoretic put in % ying al Call Implied al volatilit Call Put Call Put points Price Value Volatility Put Value y Delta Delta Gamma Gamma 1 2168 120.4 84.9 79.3 45.3 0.54 -0.34 0.0020 0.0019 2 2190 132.4 97.1 71.6 38.6 0.59 -0.30 0.0020 0.0018 3 2211 145.0 110.2 64.5 32.6 0.63 -0.26 0.0019 0.0016 4 2233 158.3 124.1 58.0 27.4 0.67 -0.23 0.0018 0.0015 5 2254 172.1 138.8 52.0 22.9 0.71 -0.20 0.0017 0.0014 6 2276 186.5 154.4 46.5 19.0 0.74 -0.17 0.0016 0.0012 7 2297 201.5 170.6 41.5 15.7 0.77 -0.14 0.0015 0.0011 8 2319 217.0 187.6 36.9 12.8 0.80 -0.12 0.0013 0.0010 9 2340 232.9 205.1 32.8 10.5 0.83 -0.10 0.0012 0.0008 10 2362 249.4 223.2 29.1 8.5 0.86 -0.08 0.0011 0.0007 11 2383 266.3 241.7 25.7 6.8 0.88 -0.07 0.0009 0.0006 12 2405 283.5 260.8 22.7 5.5 0.90 -0.06 0.0008 0.0005 13 2426 301.2 280.2 19.9 4.4 0.91 -0.05 0.0007 0.0005 14 2448 319.3 299.9 17.5 3.5 0.93 -0.04 0.0006 0.0004 15 2469 337.7 319.9 15.3 2.7 0.94 -0.03 0.0005 0.0003 -1 2126 98.3 63.4 96.6 61.5 0.46 -0.42 0.0021 0.0020 -2 2104 88.2 54.1 106.1 71.0 0.41 -0.46 0.0021 0.0021 Page 25 of 28
  26. 26. Investments Group Project Group 15 -3 2083 78.8 45.7 116.4 81.4 0.37 -0.51 0.0020 0.0021 -4 2061 70.1 38.2 127.3 92.8 0.33 -0.55 0.0019 0.0021 -5 2040 62.0 31.6 138.9 105.2 0.29 -0.60 0.0018 0.0021 -6 2018 54.5 25.9 151.1 118.6 0.25 -0.65 0.0017 0.0020 -7 1997 47.7 20.9 164.0 132.9 0.21 -0.69 0.0016 0.0020 -8 1975 41.4 16.7 177.6 148.2 0.18 -0.73 0.0015 0.0019 -9 1954 35.8 13.2 191.9 164.3 0.15 -0.77 0.0013 0.0017 -10 1932 30.8 10.3 206.8 181.2 0.12 -0.80 0.0012 0.0016 -11 1911 26.2 7.9 222.3 198.8 0.10 -0.84 0.0010 0.0014 -12 1889 22.2 6.0 238.4 217.1 0.08 -0.87 0.0009 0.0013 -13 1868 18.7 4.4 255.1 236.0 0.06 -0.89 0.0007 0.0011 -14 1846 15.6 3.3 272.3 255.3 0.05 -0.91 0.0006 0.0010 -15 1825 12.9 2.3 290.0 275.2 0.04 -0.93 0.0005 0.0008 Here we would look at the impact of time on the theoretical option prices Time Variation Da ys Deep ITM Deep to OTM call OTM put ITM call ITM put call ITM put ex Theoretic Theoretic Theoretic Theoretic Theoretic Theoretic OTM OTM ITM ITM pir al Call al Put al Call al Put al Call al Put call Put Call put Deep ITM Deep ITM y Value Value Value Value Value Value theta theta theta theta Call theta Put theta 27 97.74 73.86 128.61 125.18 270.93 269.72 -1.99 -1.66 -1.95 -1.66 -1.193286 -1.005002 26 95.73 72.18 126.65 123.50 269.74 268.72 -2.03 -1.69 -1.98 -1.70 -1.192633 -1.005563 25 93.68 70.47 124.65 121.78 268.55 267.71 -2.06 -1.73 -2.01 -1.73 -1.191116 -1.005226 24 91.60 68.73 122.62 120.03 267.36 266.71 -2.10 -1.77 -2.05 -1.77 -1.188603 -1.003841 23 89.47 66.94 120.55 118.24 266.17 265.70 -2.15 -1.81 -2.09 -1.81 -1.184936 -1.001227 22 87.30 65.12 118.44 116.41 264.99 264.70 -2.19 -1.85 -2.13 -1.85 -1.179933 -0.997172 21 85.09 63.25 116.28 114.54 263.81 263.71 -2.24 -1.89 -2.18 -1.90 -1.173380 -0.991423 20 82.82 61.33 114.08 112.62 262.64 262.72 -2.29 -1.94 -2.23 -1.94 -1.165026 -0.983681 19 80.50 59.36 111.82 110.65 261.48 261.74 -2.35 -1.99 -2.28 -2.00 -1.154576 -0.973586 18 78.12 57.34 109.51 108.62 260.34 260.78 -2.41 -2.05 -2.34 -2.05 -1.141681 -0.960705 17 75.68 55.26 107.15 106.54 259.20 259.82 -2.48 -2.11 -2.40 -2.11 -1.125930 -0.944519 16 73.17 53.12 104.72 104.40 258.09 258.89 -2.55 -2.18 -2.46 -2.18 -1.106838 -0.924398 15 70.58 50.91 102.22 102.19 256.99 257.98 -2.63 -2.25 -2.53 -2.25 -1.083833 -0.899581 14 67.92 48.63 99.65 99.90 255.92 257.09 -2.71 -2.33 -2.61 -2.33 -1.056241 -0.869138 13 65.15 46.26 96.99 97.53 254.88 256.24 -2.81 -2.41 -2.70 -2.41 -1.023274 -0.831944 12 62.29 43.80 94.25 95.08 253.87 255.43 -2.92 -2.51 -2.80 -2.51 -0.984027 -0.786628 11 59.31 41.24 91.40 92.52 252.91 254.67 -3.04 -2.62 -2.90 -2.61 -0.937475 -0.731539 10 56.20 38.56 88.43 89.85 252.00 253.97 -3.18 -2.74 -3.03 -2.73 -0.882512 -0.664716 9 52.94 35.75 85.34 87.05 251.15 253.35 -3.35 -2.88 -3.17 -2.87 -0.818042 -0.583891 8 49.50 32.79 82.09 84.10 250.37 252.81 -3.54 -3.04 -3.33 -3.03 -0.743191 -0.486611 7 45.85 29.65 78.66 80.99 249.67 252.38 -3.77 -3.24 -3.52 -3.21 -0.657751 -0.370597 6 41.94 26.31 75.03 77.67 249.06 252.07 -4.06 -3.47 -3.75 -3.43 -0.563047 -0.234669 5 37.70 22.70 71.14 74.11 248.54 251.91 -4.43 -3.75 -4.04 -3.70 -0.463529 -0.080900 4 33.04 18.78 66.93 70.26 248.13 251.92 -4.93 -4.11 -4.39 -4.02 -0.369173 0.080888 3 27.77 14.46 62.32 66.04 247.80 252.07 -5.65 -4.57 -4.86 -4.44 -0.297097 0.225755 Page 26 of 28
  27. 27. Investments Group Project Group 15 2 21.58 9.59 57.16 61.35 247.52 252.35 -6.85 -5.19 -5.48 -4.94 -0.264086 0.312348 1 13.64 4.06 51.35 56.21 247.26 252.67 -9.46 -5.79 -6.08 -5.20 -0.260242 0.328672 Recommendation BHEL does not seem to be a trading stock and has mostly been range bound for the last few years. Its valuation seems to give a BUY indication and the new capacity additions might give a fillip to the stock along with the recovery of the economy. The fundamentals of the company are strong and the capacity expansion would start bringing in the revenues in 2010.So, one needs to look out for oversold indicators and BUY on that. The July, 2008 valuations pegs the value at around 2800. The 2009 PE based valuation also gives it a strong BUY. In the absence of any technical triggers it would be a BUY and HOLD strategy. The futures pricing does not throw up any arbitrage opportunities. Also the trading volumes in the options market is not very high which implies that the impact cost would be very high in the options market and values are not close to the theoretical values. Page 27 of 28
  28. 28. Investments Group Project Group 15 References • Reliance Money BHEL Report 9th April, 2009 • Jaypee Capital Services Institutional Equity Research • Crisil Research Press Release Aug 6,2009 • Crisil Research , Indian Infrastructure • BHEL Annual Reports Page 28 of 28

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