Buy Bharat Heavy Electricals Ltd For Target Rs. 281 By JM Financial Services
4QFY25: Slower-than-expected pick-up; green shoots visible
The current thermal power capex cycle began in Sept’23, when India recorded its then highest peak demand of 243 GW, leading to a sharp and unexpected surge in ordering momentum across utilities. Consequently, 60% and 25% of the current orders of BHEL, INR 1.96 tn were booked during FY24/FY25. Considering the time-consuming revival of the dilapidated execution ecosystem and bunching of orders, BHEL reported consol net revenue of INR 89.9bn (+9%YoY, -16% JMFe) and an EBITDA of INR 8.3bn (+14%YoY, -20% JMFe) during 4QFY25. The YoY EBITDA margin improved to 9.2% vs. 8.8% in 4QFY24. Adj. PAT stood at INR 5bn (+3%YoY, -32% JMFe). Nevertheless, we expect pick up in execution from FY26 (FY25-28, 20% revenue CAGR) supported by growing and now executable order book (govt. revises its target for thermal capacity expansion from 80 GW to 100 GW by FY32). As execution of legacy projects are nearing completion (NTPC Patratu / Talcher 80%/30% completed) and industry orders-mix improves, EBITDA margin is likely to improve gradually from 4.4% in FY25 to at least 11% in FY28. We continue to maintain the BUY on the stock with a TP of INR 281 (30x FY27EPS).
* Financial performance: BHEL reported revenue of INR 89.9bn (9% YoY) largely supported by execution of its industry orders. Gross margin improved from 33% in 4QFY24 to 34% in 4QFY25. EBITDA margin stood at 9.2% vs. 8.8% in 4QFY24 driven by operating leverage. Adj. PAT came at INR 5bn (+3% YoY) as increase in EBITDA was offset by higher deprn. (24% YoY) and tax expense (36% YoY). With this annualised EBITDA margin has improved from 2.6% in FY24 to 4.4% in FY25, which we expect to gradually improve to around 10% by FY27.
* Segment performance: Power/ Industry segment reported revenue of INR 61.9bn/ INR 28bn (0%/ +34% YoY) in 4QFY25. EBIT for 4QFY25 for Power/ Industry segment is INR 3.1bn/ INR 8.8bn (4QFY24 INR 11.5bn/ INR 1.7bn) and the EBIT margin for Power/ Industry segment came at 5%/ 31.3%.
* Working capital: Currently, more than 13 GW of the thermal projects are in advance stage of commissioning in India, highest in the last decade. During FY25, total 8.1 GW of the projects were synchronised/ commissioned by BHEL, indicating softening of contract assets 3QFY26 onwards. During FY25, customer advances amounted to INR 79.3bn. Trade receivables/ Contract Assets increased to INR 89bn / INR 294bn vs. INR 80bn/ INR 267bn in FY24. Inventories have grown to INR 99bn vs. INR 72bn in FY24.
* Orders inflows: Order inflow in 4QFY25 was INR 446 bn vs. 419 bn in 4QFY24. With this, it bagged orders worth INR 925bn (INR 813bn power (14.6GW), INR 110bn industry, INR 2bn exports) in FY25. The total order book stands at INR 1,963 bn as of 31 Mar’25 (INR 1,579bn Power, INR 348bn Industry, INR 36bn exports).
* Opportunities: The government has revised its target for thermal capacity expansion from 80 GW to 100 GW by FY32 (media reports). Presently, 32 GW of projects are in the construction phase, while an additional 18 GW of projects have recently been awarded and are yet to commence construction. Consequently, the ordering for remaining c. 50 GW is anticipated over the next 2-3 years. Given the limited competition, we expect a sustained momentum in order inflow for BHEL in the medium term.
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