India Industrials: Cabinet approves coal gasification

Research evidence excerpt

India Industrials: Cabinet approves coal gasification

UpdateMValuation Methodology and Risks

Bharat Heavy Electricals Ltd (BHEL.NS)

n Probability weights: 10% bull, 80% base, 10% bear. Equal possibilities of a potential

increase in competition and strong profitability emerging for new orders.

n Base: 40x F28e P/E - average of cap goods companies, given cyclical nature of busi-

nesses.

n Bull: 45x - 12.5% premium to base case - 80% market share (vs 70% in base case) in

ordering, better margin profile

n Bear: 30x - 25% discount to base case - 50% market share. Slower margin expansion.

Risks to Upside

n Sharp contraction in receivables/stronger FCF

n Stronger ordering - better demand/self-sufficiency pretext

n Faster adoption of new environmental norms (SC or government intervention)

n Positive surprise on fixed cost control

n Reduced renewables adoption

Risks to Downside

n Further increase in working capital

n Sluggish orders - weak demand; SEB overdues and gencos balance sheet worsening

n Faster renewable adoption

Larsen & Toubro Ltd (LART.NS)

SOTP, weighted 15% bull, 75% base, 10% bear. Balance reflects pickup in domestic capex vs.

the risk of ongoing global uncertainty and the impact of lower oil prices on international busi-

ness execution and margin.

n Core: H1F28e P/E 40x bull, 30x base, 20x bear

n Listed subs: Market value of holdings with appropriate holdco discounts

n IDPL: 1x H1F28e P/B

n JV: FCFe cost of equity 12.6%; terminal growth 2%

n Increased government spending

n Moderation in steel and other material prices

n Pickup in the economy, leading to higher than-anticipated private capex

n Slowdown in government-led infra capex

n Deterioration in domestic execution cycle

n Geopolitical risks leading to slower execution

n Sharp increase in material costs