BHEL Q4 earnings: Despite Bharat Heavy Electricals Ltd (BHEL) announcing underwhelming March quarter results, characterized by minimal year-on-year revenue growth and a notable 400 basis points decrease in EBITDA margin due to increased provisioning, Nuvama Institutional Equities has significantly raised its target price for the stock by 51 percent. Their rationale behind this bullish move is their conviction that BHEL is uniquely positioned to capitalize on the upcoming surge in demand for thermal power over the next 12 to 24 months.
The brokerage noted that although higher provisioning impacted profitability in Q4, there’s optimism regarding the pipeline’s strength. Older legacy projects like North Karanpura and Patratu are indicating an acceleration in execution and are anticipated to be finalized by the end of FY25, leading to cash flows in early FY26.
During FY24, BHEL secured power orders totaling over Rs 52,000 crore, equivalent to 9.6 GW. Additionally, orders in the industry segment amounted to Rs 22,000 crore, contributing to the highest-ever annual orders recorded at Rs 78,000 crore for FY24.
Nuvama indicated that it anticipates a total addressable market (TAM) of 25GW for thermal projects across FY25–26E, compared to the 9.6GW seen in FY24. This suggests that BHEL could potentially secure thermal order inflows of 8.4 GW annually, assuming a 70 percent market share.
“We are adjusting our EPS estimates for FY25E/26E by (0.4)/7 percent due to the execution of legacy orders with lower operating profit margins until FY25, coupled with an anticipated increase in new order execution starting from FY26E,” the statement read.
In July 2023, Nuvama upgraded BHEL to a ‘BUY’ when the stock price was Rs 94. This decision was influenced by the shifting power balance towards a deficit scenario, which began in May 2023, with peak deficits observed from August to September 2023. -BHEL Q4 earnings
We project an EPS Compound Annual Growth Rate (CAGR) exceeding 88 percent over FY25–27E, despite adopting conservative assumptions. These include i) a reduced market share of 70 percent in thermal power (compared to 100 percent in FY24); ii) delayed execution acceleration until FY26; iii) increased provisions and other operating expenses; and iv) a slower ramp-up in operating profit margins (6.5 percent/11 percent/12 percent by FY25E/26E/27E) compared to the peak levels of 18–20 percent. We have valued BHEL at 30 times the March 27E EPS, resulting in a revised target price of Rs 400, up from the earlier Rs 265,” the statement indicated.
An alternative viewpoint
On the other hand, Kotak Institutional Equities has maintained its ‘Sell’ recommendation on BHEL. According to Kotak, BHEL’s performance suffered due to issues in execution and working capital management, leading to its status as a net debt company. With orders amounting to three times its revenues and potentially reaching a peak, attention is now turning to the speed of execution and margin enhancement.
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“We anticipate obstacles in both areas due to BHEL’s heavy reliance on vendors for tasks beyond Boiler, Turbine, and Generator (BTG) work. Additionally, efficient execution is crucial for reducing working capital, especially with revised terms tied more closely to project milestones. We have made a slight adjustment to our fair value to Rs 75 (previously Rs 70) based on forward-looking considerations while maintaining our ‘SELL’ recommendation,” the statement conveyed.
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