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 Dharmesh Dipak Gandhi Swapna Acharla 2008007 2008019 2007064

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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

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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 No. of Companies Key Ratios Debt-Equity Ratio Long Term Debt-Equity Ratio Current Ratio Turnover Ratios Fixed Assets Inventory Debtors Interest Cover Ratio PBIDTM (%) PBITM (%) PBDTM (%) CPM (%) APATM (%) ROCE (%) 3.94 5.48 2.7 19.94 16.93 15.3 16.17 11.32 9.69 34.68 3.85 5.28 2.62 23.77 17.24 15.62 16.58 11.56 9.94 34.87 2.98 5.1 2.37 13.98 15.53 13.5 14.56 9.91 7.88 25.72 2.62 5.02 2.4 10.55 14.46 12.23 13.3 9.17 6.95 21.49 2.45 4.59 2.15 7.39 13.99 11.55 12.43 8.12 5.68 19.15 2.41 4.23 1.97 5.48 13.51 11.18 11.47 8.62 6.28 17.93 2.24 3.76 1.84 2.26 8.11 5.39 5.73 5.66 2.94 8.26 2.48 4.07 2.08 4.14 12.56 10.02 10.14 7.22 4.68 18.08 2.72 4.15 2.33 5.88 14.29 12.05 12.24 8.1 5.87 23.74 0.18 0.17 1.53 0.17 0.15 1.52 0.19 0.16 1.53 0.22 0.18 1.58 0.26 0.21 1.61 0.35 0.2 1.5 0.39 0.2 1.39 0.34 0.21 1.37 0.35 0.23 1.37 2009 17 2006 8 2005 9 2004 11 2003 14 2002 11 2001 13 2000 13 1999 9

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RONW (%)

25.99

25.86

17.82

14.69

11.38

12.87

5.93

10.95

15.47

Source: Capitaline

INDUSTRY COMPARITIVE ANALYSIS

FY09 s Adjusted EPS (Rs) Dividend per share Operating profit per share (Rs) Net operating income per share (Rs) Profitability ratios Operating margin (%) Gross profit margin (%) Net profit margin (%) Adjusted cash margin (%) Adjusted return on net worth (%) Leverage ratios Long term debt / Equity Total debt/equity Owners fund as % of total source Fixed assets turnover ratio Liquidity ratios Current ratio Quick ratio Inventory turnover ratio Payout ratios Dividend payout ratio (net profit) Coverage ratios Adjusted cash flow time total debt Financial charges coverage ratio Component ratios Material cost component (% earnings) Selling cost Component Exports as percent of total sales Import comp. in raw mat. consumed Long term assets / total Assets 27.51 0.92 21.7 44.34 0.35 53.22 1.12 4.8 27.73 0.04 66.28 4.7 24.77 15.74 0.26 68.29 2.86 20.82 16.49 0.28 2.23 6.35 0.02 134.86 0.09 28.07 55.04 20.58 30.54 21.59 24.26 1.3 0.96 6.01 1.38 1.09 3.88 1.32 1.13 17.88 1.23 1.01 12.2 0.43 0.52 65.47 6.23 0.01 0.01 99.12 4.48 0.04 0.04 95.81 4.25 100 5.29 12.23 11.39 10.06 8.5 21.21 18.97 17.65 13.87 15.41 27.07 16.14 15.17 8.4 11.76 41.6 15.93 14.89 9.09 13.13 39.79 LARSEN & TOURBO Mar ' 09 45.05 10.5 70.72 578.06 BHEL Mar ' 09 59.59 15.25 75.75 399.18 CROMPTON GREEVES Mar ' 09 13.93 2 20.6 127.64 THERMAX LTD Mar ' 09 32.13 5 41.39 259.79

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. Chinas power equipment manufacturers, leveraging their lower costs and shorter delivery periods, have begun hitting Indian majors like BHEL where it hurts mostand 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

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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 theres 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, BHELs 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 BHELs 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

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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.

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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 ExportImport 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--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

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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 BHELs 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 Jun08. In Apr-Jun09 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?>

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<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. BHELs operating expenses has been well managed over the years and hence its EBIT is better than its competitors, closely followed by L&T. BHELs 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 BHELs 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

BHELs 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. C&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

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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

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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 Bhels 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. BHELs 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. BHELs 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 Indias 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

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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 lakhs) 2623419.00 62444.00 -115154.00 1712039.00 411279.00 33427.00 235114.00 2276705.00 409158.00 78798.00 487956.00 3071.00 484885.00 484885.00 171064.00

Description Net Sales/Income from Operations Other Operating Income Increase/Decrease in Stock in trade and work in progress Consumption of Raw Materials Employees Cost Depreciation Other Expenditure Total Expenditure Profit from Operations before Other Income, Interest & Exceptional Items Other Income Profit before Interest & Exceptional Items Interest Profit after Interest but before Exceptional Items Profit(+)/Loss(-) from Ordinary Activities before tax Tax Expense

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Net Profit(+)/Loss(-) from Ordinary Activities after tax Extraordinary Items Net Profit (+) / Loss (-) for the period Dividend (%) Face Value (in Rs.) Paid-up Equity Share Capital Reserves excluding Revaluation Reserves Basic EPS before Extraordinary items (in Rs.) Diluted EPS before Extraordinary items (in Rs.) Basic EPS after Extraordinary items (in Rs.) Diluted EPS after Extraordinary items (in Rs.) Public Shareholding (Number of Shares) Public Shareholding (%) Promoter & Promoter group Number of Shares Non-encumbered Promoter & Promoter group Shares Non-encumbered (as a % of total shareholding of Promoter and Promoter Group) Promoter & Promoter group Shares Non-encumbered (as a % total share capital of the company)

313821.00 313821.00 170 10.00 48952.00 1244929.00 64.11 64.11 64.11 64.11 158009600.00 32.28 331510400.00 100.00 67.72

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 of industry taken . Calculations shown below. Beta equity Debt/Equity MktCap Beta assets 0.170695078 0 3,443.15 0.170695078 0.546713639 0.01 107,758.00 0.541300633 Page 13 of 28

Company ALSTOM BHEL

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Crompton 0.07584418 Amaraja 0.051710637

0.04 0.7

10,347.71 0.072927096 979.97 0.030418022 Beta asset avg Debt/Equity Beta equity industry 0.487245651 0.017771062 0.495904523

Rm Rf Re

2001 21.10% onwards 4.5842% 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 -548.14 145.23 1032.81

X-variable 0.5332 0.0066 0.0750

R2 0.99 0.96 0.57

Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Administration Expenses Miscellaneous Expenses

74.05

0.0987

0.98

-88.75

0.0461

0.86

626.56

0.0000

0.01

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Ratios

Except Misc expenses all others are linearly correlated. Since misc expenses dont 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.

Fixed Asset Turnover Ratio Inventory/Sales Receivable/Sales Current Liabilities/Expenses Dividend Payout Ratio Cost of Equity Present value of 10 year Dividend Present value of 11-15 year Dividend 16-inf Residual Value Total Value Market Price (as of July 2nd 2008) Book Value as on March 2008 EPS as on March 2008 Price - Earning Ration as on July 2, 2008 Interest on investments Recommendation BUY

18.74 0.29 0.62 1.00 0.26 12.78% 216 122 2041 436 2815 2056.55 220.1 55.82 36.84 7%

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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 PEG ratio as on 2nd July,2008 At expected growth rate for next 3 years PEG of 1 is typically fairly valued Growth rate for next 3 years 25 20 15 PEG Ratio 1.47 1.84 2.46 Recommendation for July 2, 2008 SELL SELL SELL

As on 21st Aug 2009 PE ratio(for earnings 2009) 13.81548262 33.76649969 32.26139833 PEG ratio at 30% growth 0.460516087 1.12554999 1.075379944 PEG ratio at 25% growth 0.552619305 1.350659988 1.290455933

52 wk Low 52 wk High Current price(as on 21st Aug,2009)

984 2405 2297 .8

Based on Reliance Money analyst report (Based on 2009 earnings and 2010, 2011
estimated earnings) Comparison Industry BHEL Recommendation FY11 forward PE multiple 22 19.02129617 BUY as on 21st Aug 2009

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Reliance Money Report and calculations

Year Net Sales %Growth EBIDTA %Growth Other Income Interest Dep PBT %Growth Tax Deferred tax Adj PAT %Growth Extraordinary Reported PAT %Growth Div% EPS BVPS Dividend Equity Cap Reserves Net Worth Unsecured Loans Total Loans Total Liability Net Block Investments Deferred Tax Assets Inventory Debtors Cash Balance Other CA Current Liabilities Provisions NCA Total Assets Dividend growth rate 2008 193046.4 12% 33191.8 2.80% 14447.6 354.2 2972.1 44313.1 18.60% 19,620.50 -4027.7 28,720.30 18.4 -17.2 28,703.10 18.4 152.5 58.4 220.1 7465.18 4,895.20 102,846.90 107,742.10 951.8 951.8 108,693.90 16,392.90 82.9 13,379.30 57,364.00 119,748.70 83,860.20 16,074.30 165,764.50 32,443.90 78,838.80 108,693.90 2009 248,645.90 28.80% 40,259.80 21.30% 8,609.30 412.9 3,163.80 45,292.30 2.20% 15,852.30 -951.1 30,391.10 6.30% 30,391.10 6.20% 245 62.1 268 11993.24 4,895.20 126,313.10 131,208.30 900.8 900.8 132,109.10 26,835.50 82.9 12,428.20 71,934.80 169,217.40 83,923.50 13,405.70 205,471.40 40,247.40 92,762.60 132,109.10 60.66% 2010 314,636.60 26.50% 58,552.30 45.40% 10,639.60 517.1 4,975.70 63,699.10 40.60% 22,294.70 -1,274.00 42,678.40 40.40% 42,678.40 40.40% 250 87.2 341.1 12238 4,895.20 162,066.60 166,961.80 900.8 900.8 167,862.60 28,298.00 82.9 11,154.20 88,084.20 193,151.90 133,257.80 13,405.70 257,481.20 42,090.80 128,327.60 167,862.60 2.04% 2011 385,115.20 22.40% 73,347.30 25.30% 12,921.30 611.2 5,531.00 80,126.40 25.8 28,044.20 -1,602.50 53,684.70 25.80% 53,684.70 25.80% 270 109.7 81.1 13217.04 4,895.20 208,826.40 213,721.60 900.8 900.8 214,622.40 31,126.20 82.9 9,551.70 105,984.80 229,999.30 182,969.80 13,405.70 313,468.60 45,029.30 173,861.60 214,622.40 8.00%

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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 Mar09 and then has been trading slightly above 50-day MA. This is possibly explained by the overall market turnaround in Mar09 and the stock price has gone up on market momentum.

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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.

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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 companys 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 Dec09 quarter is out. This will be a good point to buy and hold for a long term, as it will probably cause a breakout.

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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.
Futures Price 2223 2150 2190.1 2073.25 2145 2043.25 2015.3 1973.7 1957.75 2045.8 2172.1 2187.35 2228.65 2277 2212.4 2148.2 2175.2 2208.85 2261.6 2270.15 2248.4 2210.9 2234.85 2351.55 2335.5 Change in OI % 8.99% 4.30% 13.89% 1.82% 3.51% 5.00% 8.40% 18.63% 4.17% 11.11% 2.58% 10.19% -5.88% 93.12% 48.90% 0.46% 4.74% 6.42% 6.68% 11.09% 15.53% 15.79% -1.34% -1.18% -9.13% Spot Price 2214.5 2153.5 5 2186.3 2100.5 2132.7 2047.9 2022.2 5 1985.9 5 1959.7 5 2047.5 5 2187.2 2200.4 5 2227.2 2276.6 2213.6 2146.6 5 2168.2 2210.6 5 2260.8 2263.5 5 2239.3 2200.8 2230.3 2346.6 5 2331.3 5 Differe nce 8.5 -3.55 3.8 -27.25 12.3 -4.65 -6.95 -12.25 -2 -1.75 -15.1 -13.1 1.45 0.4 -1.2 1.55 7 -1.8 0.8 6.6 9.1 10.1 4.55 4.9 4.15 -2.75% 1.52% -3.92% 1.53% -3.98% -1.25% -1.80% -1.32% 4.48% 6.82% 0.61% 1.22% 2.22% -2.77% -3.02% 1.00% 1.96% 2.27% 0.12% -1.07% -1.72% 1.34% 5.22% -0.65% Daily spot price return Theoretic al futures price 2231.2 2169.5 2202.2 2115.0 2147.1 2061.5 2035.4 1998.6 1971.4 2059.5 2199.7 2212.7 2239.3 2288.1 2224.4 2156.9 2178.2 2220.6 2270.1 2272.5 2247.9 2209.0 2238.3 2354.1 2338.4 Deviation From theoretical price(%) -0.37% -0.90% -0.55% -1.97% -0.10% -0.88% -0.99% -1.24% -0.69% -0.66% -1.25% -1.15% -0.48% -0.48% -0.54% -0.40% -0.14% -0.53% -0.37% -0.10% 0.02% 0.09% -0.15% -0.11% -0.13% 0 1 0 1 0 0 0 0 1 1 1 1 1 0 0 1 1 1 1 0 0 1 1 0 YES YES YES YES NO NO NO YES NO NO NO NO YES NO YES NO NO NO YES NO YES NO YES Increase/dec rease Trend Reversal cost of carry 8.5 -3.55 3.8 -27.25 12.3 -4.65 -6.95 -12.25 -2 -1.75 -15.1 -13.1 1.45 0.4 -1.2 1.55 7 -1.8 0.8 6.6 9.1 10.1 4.55 4.9 4.15

Date 1-Jul09 2-Jul09 3-Jul09 6-Jul09 7-Jul09 8-Jul09 9-Jul09 10-Jul09 13-Jul09 14-Jul09 15-Jul09 16-Jul09 17-Jul09 20-Jul09 21-Jul09 22-Jul09 23-Jul09 24-Jul09 27-Jul09 28-Jul09 29-Jul09 30-Jul09 31-Jul09 3-Aug09 4-Aug09

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5-Aug09 6-Aug09 7-Aug09 10Aug-09 11Aug-09

2318.7 2272.3 2182.9 2146.15 2145.8

0.88% -3.64% 2.66% -0.55% -3.04%

2309.9 2273.2 2183.2 2148.5 2147.4 5

8.8 -0.9 -0.3 -2.35 -1.65

-0.92% -1.59% -3.96% -1.59% -0.05%

2316.6 2279.5 2189.0 2153.3 2152.0

0.09% -0.32% -0.28% -0.33% -0.29%

0 0 0 0 0

NO NO NO NO NO

8.8 -0.9 -0.3 -2.35 -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) Interest Rate Expiry Date Div Yield OTM Call Strike Price Theoretical Call Value Theoretical Put Value Actual Call Value Current Date DTE Years Implied Call Volatility Historical Volatility Implied Put Volatility OTM Put Strike Price Actual Put Value ITM call strike price ITM Put Strike price Deep ITM call strike price Deep ITM put strike price Final implied Volatility (based on 11th Aug, pricing) 2147 5% 8/27/2009 0% 2160 109.0267 87.62995 74.4 8/11/2009 16 0.043836 43.69% 0.63 42.90% 2100 52.95 2100 2200 1900 2400

43%

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OTM Call Option at 2160

Date 3-Aug-09 4-Aug-09 5-Aug-09 6-Aug-09 7-Aug-09 10-Aug-09 11-Aug-09 12-Aug-09 13-Aug-09 14-Aug-09 17-Aug-09 18-Aug-09 19-Aug-09 20-Aug-09 21-Aug-09 24-Aug-09 25-Aug-09 26-Aug-09 Underlying price 2346.65 2331.35 2309.9 2273.2 2183.2 2148.5 2147.45 2159.2 2225.6 2200.6 2181.25 2246.85 2214.85 2253.75 2301.8 2343.8 2303.5 2298.6 Call at 2160 119.7 119.7 119.7 119.7 94.15 75 74.4 70.2 92.75 92.75 71.75 71.75 71.75 100 130 130 130 130 Theoretical value 261.3747654 247.4520088 229.2770602 201.0905789 142.3022632 113.2179646 109.0749512 111.4934474 145.9973477 126.8258973 102.6873871 138.7121878 112.9871153 133.8615913 165.1910313 188.9577607 147.9859379 139.7048955 Theoretical value at implied volatility 224.0332809 210.1616256 191.7078295 162.5536194 102.1096946 76.23906465 73.21060433 76.64967366 113.4218587 94.75348234 74.3010344 114.3336464 88.61798624 113.5249231 150.7981669 185.1730884 144.5999616 138.9133832 Open Int Difference -104.3333 -90.46163 -72.00783 -42.85362 -7.959695 -1.239065 1.189396 -6.449674 -20.67186 -2.003482 -2.551034 -42.58365 -16.86799 -13.52492 -20.79817 -55.17309 -14.59996 -8.913383 Implied Call Volatility 150 0.004% 150 0.004% 150 0.004% 150 12.127% 300000 39.028% 300750 42.332% 300900 43.667% 301050 39.303% 300600 29.613% 300600 41.737% 300600 41.195% 300600 0.004% 300600 28.149% 300300 25.898% 300300 0.004% 300300 0.004% 300300 0.004% 300300 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
Date 3-Aug-09 4-Aug-09 5-Aug-09 6-Aug-09 7-Aug-09 10-Aug-09 11-Aug-09 12-Aug-09 Underlying price 2346.65 2331.35 2309.9 2273.2 2183.2 2148.5 2147.45 2159.2 Call at 2100 131 131 131 131 131 131 131 96.7 Theoretical value 303.5098803 289.0274437 269.8920818 239.6950756 174.8629498 143.4295701 139.2860326 142.8132206 Theoretical value at implied volatility 272.0068753 257.4451087 237.7930455 206.0490319 137.2291292 107.8424972 104.7736527 109.7851662 Difference -141.0069 -126.4451 -106.793 -75.04903 -6.229129 23.1575 26.22635 -13.08517 Implied Call Volatility 0.004% 0.004% 0.004% 0.004% 39.577% 56.049% 58.224% 34.824% Open Int 1200 1200 1200 1200 1200 1200 1200 900

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13-Aug-09 14-Aug-09 17-Aug-09 18-Aug-09 19-Aug-09 20-Aug-09 21-Aug-09 24-Aug-09 25-Aug-09 26-Aug-09

2225.6 2200.6 2181.25 2246.85 2214.85 2253.75 2301.8 2343.8 2303.5 2298.6

96.7 96.7 96.7 96.7 96.7 96.7 96.7 96.7 96.7 96.7

183.1890683 162.1851652 137.1095404 180.1627955 151.8707901 177.596322 214.5047261 245.8861828 204.9241973 198.929913

154.7980619 133.5682736 111.6600515 161.0212818 131.9835872 162.8368268 205.7175438 244.6504215 204.0631084 198.863813

-58.09806 -36.86827 -14.96005 -64.32128 -35.28359 -66.13683 -109.0175 -147.9504 -107.3631 -102.1638

0.004% 0.004% 29.827% 0.004% 0.004% 0.004% 0.004% 0.004% 0.004% 0.004%

900 900 900 900 900 900 900 900 900 900

Again we see a huge difference in the pricing, mainly due to very less liquidity.

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OTM Put Option at 2100

Date 3-Aug-09 4-Aug-09 5-Aug-09 6-Aug-09 7-Aug-09 10-Aug-09 11-Aug-09 12-Aug-09 13-Aug-09 14-Aug-09 17-Aug-09 18-Aug-09 19-Aug-09 20-Aug-09 21-Aug-09 24-Aug-09 25-Aug-09 26-Aug-09 Underlying price 2346.65 2331.35 2309.9 2273.2 2183.2 2148.5 2147.45 2159.2 2225.6 2200.6 2181.25 2246.85 2214.85 2253.75 2301.8 2343.8 2303.5 2298.6 Put at 2100 57.55 57.55 57.55 57.55 41.5 56 51.1 51.1 24.5 23.9 34.9 11.9 10 3.1 2 2 2 2 Theoretical value 50.54522901 51.62552337 54.20292543 60.9687161 86.39942026 90.45472812 87.62415251 79.66433531 53.90321084 58.16236862 53.22612449 30.94257243 34.91379299 22.00258389 11.12427999 1.295811014 0.897249725 0.066422724 Theoretical value at implied volatility 30.88821095 32.58679322 35.85326861 43.66936395 73.49577845 83.13637004 81.42838475 73.38796307 44.03069106 50.63289156 50.34237799 25.04570271 31.60078924 17.87850674 7.372565227 0.560134618 0.557958367 0.042364629 Difference 26.66179 24.96321 21.69673 13.88064 -31.9958 -27.1364 -30.3284 -22.288 -19.5307 -26.7329 -15.4424 -13.1457 -21.6008 -14.7785 -5.37257 1.439865 1.442042 1.957635 Implied Put Volatility 66.921% 66.341% 64.892% 61.092% 39.005% 43.644% 41.821% 45.742% 42.225% 38.746% 48.771% 43.125% 36.976% 34.595% 41.721% 67.921% 72.399% 100.391% Open Interest 300 300 300 300 300 300 300 300 300 450 2400 3300 3900 3750 3750 3750 3750 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. Lets look at what difference the variation in price has on option prices and the corresponding delta, gamma indicators
Put Value at implied put volatilit y 45.3 38.6 32.6 27.4 22.9 19.0 15.7 12.8 10.5 8.5 6.8 5.5 4.4 3.5 2.7 61.5 71.0

Variation in % points 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 -1 -2

Underl ying Price 2168 2190 2211 2233 2254 2276 2297 2319 2340 2362 2383 2405 2426 2448 2469 2126 2104

Theoretic al Call Value 120.4 132.4 145.0 158.3 172.1 186.5 201.5 217.0 232.9 249.4 266.3 283.5 301.2 319.3 337.7 98.3 88.2

Call Value at Implied Volatility 84.9 97.1 110.2 124.1 138.8 154.4 170.6 187.6 205.1 223.2 241.7 260.8 280.2 299.9 319.9 63.4 54.1

Theoretic al Put Value 79.3 71.6 64.5 58.0 52.0 46.5 41.5 36.9 32.8 29.1 25.7 22.7 19.9 17.5 15.3 96.6 106.1

Call Delta 0.54 0.59 0.63 0.67 0.71 0.74 0.77 0.80 0.83 0.86 0.88 0.90 0.91 0.93 0.94 0.46 0.41

Put Delta -0.34 -0.30 -0.26 -0.23 -0.20 -0.17 -0.14 -0.12 -0.10 -0.08 -0.07 -0.06 -0.05 -0.04 -0.03 -0.42 -0.46

Call Gamma 0.0020 0.0020 0.0019 0.0018 0.0017 0.0016 0.0015 0.0013 0.0012 0.0011 0.0009 0.0008 0.0007 0.0006 0.0005 0.0021 0.0021

Put Gamma 0.0019 0.0018 0.0016 0.0015 0.0014 0.0012 0.0011 0.0010 0.0008 0.0007 0.0006 0.0005 0.0005 0.0004 0.0003 0.0020 0.0021

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-3 -4 -5 -6 -7 -8 -9 -10 -11 -12 -13 -14 -15

2083 2061 2040 2018 1997 1975 1954 1932 1911 1889 1868 1846 1825

78.8 70.1 62.0 54.5 47.7 41.4 35.8 30.8 26.2 22.2 18.7 15.6 12.9

45.7 38.2 31.6 25.9 20.9 16.7 13.2 10.3 7.9 6.0 4.4 3.3 2.3

116.4 127.3 138.9 151.1 164.0 177.6 191.9 206.8 222.3 238.4 255.1 272.3 290.0

81.4 92.8 105.2 118.6 132.9 148.2 164.3 181.2 198.8 217.1 236.0 255.3 275.2

0.37 0.33 0.29 0.25 0.21 0.18 0.15 0.12 0.10 0.08 0.06 0.05 0.04

-0.51 -0.55 -0.60 -0.65 -0.69 -0.73 -0.77 -0.80 -0.84 -0.87 -0.89 -0.91 -0.93

0.0020 0.0019 0.0018 0.0017 0.0016 0.0015 0.0013 0.0012 0.0010 0.0009 0.0007 0.0006 0.0005

0.0021 0.0021 0.0021 0.0020 0.0020 0.0019 0.0017 0.0016 0.0014 0.0013 0.0011 0.0010 0.0008

Here we would look at the impact of time on the theoretical option prices
Time Variation
Da ys to ex pir y 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 OTM call Theoretic al Call Value 97.74 95.73 93.68 91.60 89.47 87.30 85.09 82.82 80.50 78.12 75.68 73.17 70.58 67.92 65.15 62.29 59.31 56.20 52.94 49.50 45.85 41.94 37.70 33.04 27.77 OTM put Theoretic al Put Value 73.86 72.18 70.47 68.73 66.94 65.12 63.25 61.33 59.36 57.34 55.26 53.12 50.91 48.63 46.26 43.80 41.24 38.56 35.75 32.79 29.65 26.31 22.70 18.78 14.46 ITM call Theoretic al Call Value 128.61 126.65 124.65 122.62 120.55 118.44 116.28 114.08 111.82 109.51 107.15 104.72 102.22 99.65 96.99 94.25 91.40 88.43 85.34 82.09 78.66 75.03 71.14 66.93 62.32 ITM put Theoretic al Put Value 125.18 123.50 121.78 120.03 118.24 116.41 114.54 112.62 110.65 108.62 106.54 104.40 102.19 99.90 97.53 95.08 92.52 89.85 87.05 84.10 80.99 77.67 74.11 70.26 66.04 Deep ITM call Theoretic al Call Value 270.93 269.74 268.55 267.36 266.17 264.99 263.81 262.64 261.48 260.34 259.20 258.09 256.99 255.92 254.88 253.87 252.91 252.00 251.15 250.37 249.67 249.06 248.54 248.13 247.80 Deep ITM put Theoretic al Put Value 269.72 268.72 267.71 266.71 265.70 264.70 263.71 262.72 261.74 260.78 259.82 258.89 257.98 257.09 256.24 255.43 254.67 253.97 253.35 252.81 252.38 252.07 251.91 251.92 252.07

OTM call theta -1.99 -2.03 -2.06 -2.10 -2.15 -2.19 -2.24 -2.29 -2.35 -2.41 -2.48 -2.55 -2.63 -2.71 -2.81 -2.92 -3.04 -3.18 -3.35 -3.54 -3.77 -4.06 -4.43 -4.93 -5.65

OTM Put theta -1.66 -1.69 -1.73 -1.77 -1.81 -1.85 -1.89 -1.94 -1.99 -2.05 -2.11 -2.18 -2.25 -2.33 -2.41 -2.51 -2.62 -2.74 -2.88 -3.04 -3.24 -3.47 -3.75 -4.11 -4.57

ITM Call theta -1.95 -1.98 -2.01 -2.05 -2.09 -2.13 -2.18 -2.23 -2.28 -2.34 -2.40 -2.46 -2.53 -2.61 -2.70 -2.80 -2.90 -3.03 -3.17 -3.33 -3.52 -3.75 -4.04 -4.39 -4.86

ITM put theta -1.66 -1.70 -1.73 -1.77 -1.81 -1.85 -1.90 -1.94 -2.00 -2.05 -2.11 -2.18 -2.25 -2.33 -2.41 -2.51 -2.61 -2.73 -2.87 -3.03 -3.21 -3.43 -3.70 -4.02 -4.44

Deep ITM Call theta -1.193286 -1.192633 -1.191116 -1.188603 -1.184936 -1.179933 -1.173380 -1.165026 -1.154576 -1.141681 -1.125930 -1.106838 -1.083833 -1.056241 -1.023274 -0.984027 -0.937475 -0.882512 -0.818042 -0.743191 -0.657751 -0.563047 -0.463529 -0.369173 -0.297097

Deep ITM Put theta -1.005002 -1.005563 -1.005226 -1.003841 -1.001227 -0.997172 -0.991423 -0.983681 -0.973586 -0.960705 -0.944519 -0.924398 -0.899581 -0.869138 -0.831944 -0.786628 -0.731539 -0.664716 -0.583891 -0.486611 -0.370597 -0.234669 -0.080900 0.080888 0.225755

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2 1

21.58 13.64

9.59 4.06

57.16 51.35

61.35 56.21

247.52 247.26

252.35 252.67

-6.85 -9.46

-5.19 -5.79

-5.48 -6.08

-4.94 -5.20

-0.264086 -0.260242

0.312348 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.

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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

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