Shares of Bharat Heavy Electricals (BHEL), a leading engineering and manufacturing company in the energy and infrastructure sectors, have delivered exceptional returns to their shareholders in the last one-year period, moving from ₹42.10 apiece to the current position of ₹85.50, producing a fabulous return of nearly 104%.
Taking the current trading price into consideration, the company shares are just 6.33% away from their 52-week high of ₹91.6, which they last attained in December last year.
In its latest note, domestic brokerage firm ICICI Securities has reaffirmed its positive outlook on BHEL, citing several key factors, including a new electricity plan, a significant rise in orders, low competitive intensity in the EPC and BTG market and cost-control measures.
The New Electricity Plan: “India is planning to add another 25 GW of coal power under the new National Electricity Plan to meet the total demand effectively by 2030. Note that the current coal pipeline is 25 GW. Thus, we expect 5–6 GW per year to be tendered over the next 4 years. Under the new plan, the company's capacity additions in the nuclear and hydro segments are on the aggressive side and, we believe, prone to disappointment,” said ICICI Securites.
Competitive intensity is low: The EPC and BTG market for thermal power plants is dominated by a duopoly with limited interest from international players. BHEL and L&T have been the primary participants in the bidding process, resulting in a low level of competitive intensity, said the brokerage.
Reduction in slow-moving orders: According to the ICICI Securites, around 20% of BHEL's current order book comprises slow-moving orders. However, with the slowdown in capacity addition, there is an expectation that these orders will pick up pace and contribute to BHEL's growth in the coming period.
During FY24, work on Raghunathpur (part of the slow-moving orders) has started progressing, it stated.
Order uptick in FY24-YTD: The brokerage said that the company has witnessed a significant increase in order inflow in the current financial year. Notably, it has secured orders worth Rs120 billion from Indian Railways for Vande Bharat, and it is also the lowest bidder (L1) for an 800 MW EPC order and a turbine order for hydro power. The total order inflow in FY24-YTD stands at ₹210 billion.
Orders from industry pick up: The company has received orders worth ₹94 billion from various industries in FY23. These orders include defence contracts, such as an order for guns from the Navy. BHEL is actively pursuing new opportunities in the defence sector to further diversify its order book, the brokerage highlighted.
Working capital to improve: In FY23, contract assets of BHEL increased to ₹297 billion, primarily attributed to legacy orders with unfavorable payment terms. However, as the company progresses with the execution of these orders, payments are expected to become due.
Additionally, with the initiation of new contracts featuring improved payment terms and advances, the brokerage anticipates a decline in working capital intensity and an overall improvement in the medium term. This shift in payment dynamics is likely to have a positive impact on BHEL's financial position and operational efficiency, it noted.
Outlook and Valuation: With domestic thrust towards manufacturing and the company’s effort towards improving its balance sheet, BHEL’s business can stage a strong turnaround given its strong technical track record. It is taking cost-control measures and working on reducing receivables, with an increased focus on cash flow.
The brokerage maintains its earnings estimates for FY24E and FY25E but anticipates a potential reevaluation of the stock due to an improved outlook for order inflow in the coming years. Consequently, ICICI Securities has revised its target price to ₹110 per share, up from ₹100, based on a valuation of 20x FY25E EPS of ₹5.5 (previously 18x FY25E EPS).
21 analysts polled by MintGenie on average have a 'sell' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.