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It only gets better hereon; order inflow remains key metric

BHEL reported its highest quarterly order inflow of INR 145bn in Q1FY24 and is L1 in ~INR 80bn worth of orders. We expect order inflow for FY24E and FY25E to be >INR 400bn aided by improving order prospects for thermal coal. We believe India needs to add 5GW per year for next 15 years. We estimate 50GW of coal-based capacity to be >40 years old by FY32. India peak demand is expected to be 375GW by FY32 at 6% CAGR, or 330GW at 5% CAGR. To meet this additional peak demand, government is looking to add 75GW of storage and 50GW of thermal capacity. Note that storage is still at a nascent stage and ~20% of operational capacity will have aged to >40 years by 2032. In our opinion, India will therefore need to enhance its arsenal of thermal power plants to ensure smooth energy transition. As a result, BHEL is expected to remain a key beneficiary.

Near-term pipeline of coal power plants

The near-term pipeline of thermal power plants is of ~8.5GW, (worth ~INR1trn), over next 12-18 months. Note that as new projects get identified, the pipeline continues to become robust. NTPC is looking to award 7GW in standalone and 3GW in JVs over next two years. NLC plans to award 4GW over next 12 months.

Medium-term pipeline and longer-term outlook

The government (CEA) is expected to add 50GW of coal-based capacity – 25GW is being set up and another 25GW is expected over next 3-4 years. BHEL expects to win 15-20GW worth INR 1.4trn-1.8trn). Note that 50GW of power plant will be >40 years old by FY32 necessitating a further build-up of coal power plants.

A set of other opportunities to improve prospects

During the quarter, BHEL booked a Vande Bharat order worth INR 130bn. As India proceeds with upgrading its trainsets to achieve semi-high speed aspirations, this order will be a stepping stone. BHEL has been able to garner INR 100bn-200bn orders from industry division in the last three years in absence of thermal orders.

Maintain BUY with TP of INR 120

We believe an order inflow of >INR 400bn over next three years will lead to rerating of the stock. As legacy orders get finish and execution on new projects starts, we expect, margins and profit to improve materially by FY26E. We maintain our BUY rating on the stock with an increased TP of INR 120 (earlier: INR 110).

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