Bharat Heavy Electricals Ltd (BHEL) reported a disappointing set of March quarter results, with largely flat year-on-year revenue growth and a 400 basis points drop in Ebitda margin on higher provisioning. Yet, Nuvama Institutional Equities has upped its target price on the stock by 51 per cent, as it feels BHEL is best placed to ride thermal power wave over next 12–24 months.
The brokerage said while higher provisioning hit profitability in Q4, the pipeline looks stronger. Old legacy projects such as North Karanpura and Patratu are showing signs of execution pickup and are expected to be completed by end-FY25 with cash flows in early FY26.
In FY24, BHEL had 9.6GW power orders worth Rs 52,000 crore-plus; industry segment order of Rs 22,000 crore, taking annual orders to highest-ever at Rs 78,000 crore in FY24. Nuvama said it sees 25GW of thermal total addressable market (TAM) spread over FY25–26E (versus 9.6GW in FY24), implying BHEL’s thermal order inflows of 8.4GW per year at 70 per cent market share.
"We are revising FY25E/26E EPS by (0.4)/7 per cent given execution of low OPM legacy orders till FY25 and pickup in new order execution from FY26E," it said.
Nuvama had in July 2023 upgraded BHEL to a ‘BUY’ when the stock price was Rs 94 given the power balance had already shifted towards a deficit scenario from May 2023, with peak deficits visible from August-September 2023.
"We estimate EPS CAGR would be 88 per cent-plus over FY25–27E, despite conservative assumptions: i) 70 per cent market share in thermal power (versus 100 per cent in FY24); ii) delayed execution pickup by FY26; iii) higher provisions and other opex; and iv) slow OPM ramp-up (6.5 per cent/11 per cent/12 per cent by FY25E/26E/27E) versus 18–20 per cent achieved during peak. We value BHEL at 30 times March 27E EPS, implying a revised target price of Rs 400 (earlier Rs 265)," it said.
Another view
Kotak Institutional Equities, meanwhile, has retained its 'Sell' on BHEL. BHEL’s results were weak on execution and working capital, making it a net debt company, Kotak said With ordering at 3 times of revenues and potentially peaked out, the focus would shift to the pace of execution and margin improvement.
"We see impediments to both on account of high dependence of vendors beyond BTG work. Execution is also key to working capital reduction given revised terms linked more to milestones. We marginally revise our FV to Rs 75 (from Rs 70) on roll-forward, retain SELL," it said.