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‘Keep it simple, stupid’!

The headline embodies a design principle (introduced by US Navy in 1960), which means that design for any system should be simple and elegant. Likewise, India’s power grid needs a simple solution like thermal power to ensure its reliability, which is currently challenged by the increasingly varying availability of renewable electricity. While storage of renewable energy is a long-term solution, it is uneconomical as of now and not scalable for grid operations. As a result, in the recently announced National Electricity Plan, the government is looking to start construction on new thermal power projects (totaling 25GW). BHEL remains a natural beneficiary of the thus improving outlook for new thermal capacity addition amidst limited competition. It remains one of our top picks in the industrial space. Maintain BUY with a revised target price of Rs110 (earlier: Rs100).

* The new Electricity Plan – envisages 25GW of thermal power: India is planning to add another 25GW of coal power under the new National Electricity Plan to meet the total demand effectively by 2030. Note that the current coal pipeline is at 25GW. Thus, we expect 5-6GW per year to be tendered over the next 4 years. Under the new plan, the firm capacity additions in nuclear and hydro segments are on the aggressive side and, we believe, prone to disappointment.

* A duopoly, hence competitive intensity is low: EPC and BTG market for thermal power plants is a duopoly with limited interest from international players. Bids conducted so far have seen participation from L&T and BHEL only.

* Reduction in slow-moving orders: 20% of BHEL’s existing orderbook is slow-moving. With a slowdown in capacity addition, we expect a few of the slow-moving orders to come on track. During FY24, work on Raghunathpur (part of the slow-moving orders) has started progressing.

* Order uptick in FY24-YTD: BHEL has already received Rs120bn worth of orders from Indian Railways for Vande Bharat and is also L1 in an 800MW EPC order and a turbine order for hydro. As a result, the value of total order inflow in FY24-YTD is Rs210bn.

* Orders from industry pick up: Order inflow from industry in FY23 was worth Rs94bn, including an order for guns from the Navy. Defence is one area where BHEL is actively pursuing new opportunities.

* Working capital to improve with execution of legacy orders: Contract assets grew towards the end of FY23 to Rs297bn, due to legacy orders where the payment terms were adverse. As payments become due under old contracts with increased execution, and advances kick in under new contracts with better payment terms, we expect working capital intensity to decline and improve in the medium term.

* Maintain BUY: We believe BHEL is likely to benefit from an improving thermal order pipeline and subdued competitive intensity. Order outlook has improved from the draft plan (25GW vs 18GW earlier). We expect a rerating of the stock on the back of increased order inflow in FY24E and FY25E. Maintain BUY with a revised target price of Rs110 per share (based on 20x FY25E EPS).

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