Hold Bharat Heavy Electricals Ltd for the Target Rs. 250 By Prabhudas Liladhar Capital Ltd
Healthy Q2 with uptick in execution pace
Quick Pointers:
* Order intake decreased by ~30.6% YoY to ~Rs219bn (against higher base), comprising ~184bn from Power and ~Rs35.6bn from Industry (inc. Exports)
* Excluding net provisions withdrawn of Rs100mn in H1FY26 (vs net provisions withdrawn of Rs1.7bn in H1FY25), Adj. EBITDA margin stood at 0.3% in H1FY26 (vs -0.5% in H1FY25)
BHEL delivered a healthy performance with revenue rising 14.1% YoY and EBITDA margin expanding 356bps YoY to 7.7%, aided by healthy execution across both Power and Industry segments. The Power segment grew ~12% YoY, supported by healthy execution of its order book (Rs1.8trn in Q2FY26), while thermal order inflow momentum remained elevated at ~Rs183bn including ~Rs140bn EPC packages order of 2x660MW project reaffirming BHEL’s positioning in the domestic thermal space. Industry segment maintained its growth trajectory (+18% YoY) driven by accelerating traction across transmission, transportation, oil & gas, and defense verticals. Industry’s order inflows improved sharply to Rs36bn (vs Rs17bn in Q2FY25). With a robust execution of order backlog and rise in public/private capex, BHEL is well placed for sustained growth. However, the increase in contract assets (~2% YoY to Rs290bn) and CFO of -Rs11.9bn in H1FY26 (vs -Rs9.7bn in H1FY25) will remain key monitorable in near term. The stock is currently trading at a P/E of 25.2x/19.0x on FY27/28E earnings. We roll forward to Sep’27E and maintain our ‘Hold’ rating valuing the stock at a PE of 22x Sep’27E (22x Mar’27E) with a revised TP of Rs250 (Rs215 earlier)
Long term view: We believe that the execution is showing some sign of revival despite not keeping pace with the strong order wins in recent years, however in the long run 1) large thermal power order pipeline, 2) diversification into railways, defense, green hydrogen, coal gasification, etc., and 3) growing spares & services business could augurs well for BHEL. However, execution pace and balance sheet health continues to be key monitorable.
Healthy execution led to revenue growth and margin expansion: Standalone revenue grew by 14.1% YoY to Rs75.1bn (PLe: Rs71.3bn) led by growth in Power segments (+12.9% YoY to Rs56.8bn) and growth in Industry segments (+18% YoY to Rs18.4bn). Gross margin contracted by 212bps YoY to 30.6% (PLe: 32.6%). EBITDA increased by 111.2% YoY to Rs5.8bn (PLe: Rs1.5bn) with EBITDA margins expanding by 356 bps YoY to 7.7% (PLe: 2.1%) led by decrease in other expenses (-42.4% YoY to Rs2.4bn) and lower employee cost (-258 bps YoY % of sales).. Adj. PAT increased by 280.3% to Rs3.7bn (PLe: Rs179mn) driven by increase in other income (+53.5% YoY to Rs1.8bn) and lower effective tax rate (-146 bps YoY to 25.3%).
Robust order book: Order inflows declined 30.6% YoY to ~Rs219bn, led by a mix of Power/Industry (incl. exports) at 84%/16%. The order book remains robust at ~Rs2.2trn (7.5x TTM revenue), with Power/Industry composition at 80%/20%. Key wins in Q2 included EPC and BTG packages for thermal power projects, Kavach equipment from Indian Railways, and transformer supplies for power plants.
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