Bhel Rating | Reduce — Structural challenges limit prospects


To reassess our view on BHEL, we sized up the prospects for thermal power growth. We conclude that: (i) Displacement from renewable energy (RE) will limit thermalp ordering to 6-7 GW (25-30% of installed base) even in case of 6% power demand growth for the next seven years; (ii) setting up of thermal capacity by central utilities to meet peak demand will be less profitable; (iii) weak balance sheet of SEBs limit their ability to sign fresh long-term PPAs; and (iv) BHEL’s balance sheet and cash flow are unlikely to revive meaningfully with SEBs accounting for more than 50% of receivables.

Overall, BHEL is unlikely to generate revenue growth beyond 6–8% over five years, which would limit its returns structure. Hence, we are downgrading the stock from ‘BUY/SO’ to ‘REDUCE/SP’ with a TP ofRs 60 at a PE of 12x (40% discount to sector PE) versus our earlier DCF-based TP of Rs 85. New opportunities on the anvil, but unlikely to be a game-changer: We expect BHEL to garner an additional Rs 100 bn of orders over the next three years from clean air technologies (Rs 75 bn in orderbook). BHEL is also targeting opportunities in transportation with Kawasaki. However, we do not anticipate significant revenue outperformance over two–three years from non-thermal avenues.

Outlook: Challenges prevail – Despite dominant market share and stabilising OPMs, BHEL continues to face long-term challenges thrown up by emergence of RE and much weaker thermal power demand. A spurt in GDP driving power demand (8-9%) and improving financial health of SEBs will imply 12-14 GW of annual thermal ordering resulting in TP of Rs 97.

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