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Robust order inflow; expensive valuation

BHEL, a public sector entity, is India’s largest engineering company and dominates the supply of equipment for power plants in India. The company’s products include gas turbines, generators, thermal sets, diesel shunters, turbo sets, hydro sets, power transformers, switch gears, circuit breakers and boilers. The Company also manufactures compressors, valves, rectifiers, pumps, capacitors, oil rigs, as well as castings and forgings.

• Robust performance of the industry segment lifted consolidated topline by 6.8% YoY to Rs. 5,273cr in Q3FY24. However, the power segment delivered a muted performance during the quarter.

• EBITDA was a negative Rs. 63cr versus Rs 144cr in Q3FY23. Thus, the company reported a loss after tax of Rs. 149cr.

• Order inflow was Rs. 36,048 in Q3FY24 vs Rs. 15,232cr in Q3FY23, registering a 137% YoY growth.

• Huge order backlog from Power and Industry segments will drive the top line. However, Upside potential is limited due to cost pressures and high valuations. Hence, we maintain a cautious outlook on the stock and downgrade our rating to SELL with a rolled-forward target price of Rs. 203, based 68X FY26E adjusted EPS.

Industry segment lifts topline; EBITDA remains negative

In Q3FY24, BHEL’s consolidated revenue grew 6.8% YoY to Rs. 5,273cr, driven by the robust performance of the industry segment. However, muted growth in the power segment limited the revenue growth. The industry revenue increased 28.0% YoY to Rs. 1,213cr, while the power segment rose 1.7% YoY to Rs. 4,061cr. In Q3FY24, EBITDA remained negative at Rs. 63cr versus Rs. 144cr in Q3FY23. This was mainly due to higher cost of sales of Rs. 4,029cr, up 9.5% YoY because of a rise in the input cost. Consequently, after-tax loss was at Rs. 149cr.

Healthy order intake

Order inflow was at Rs. 36,048cr (+137% YoY), aided by growth in the core sectors of the economy, coupled with demand for defense products. This takes the order backlog to Rs. 1,08,618cr (+4.7% YoY), with the power segment alone contributing to 70% of the total backlog, while 26% is attributed to industry segment. At 4.55X TTM revenues ,this order book backlog size provides top-line visibility for the medium term

.Key highlights

• BHEL recently awarded a Rs. 5,500cr power project from Haryana Power Corporation and a Rs. 15,000cr power project from NLC India Ltd for supply of equipment, erection and commissioning, and civil works to be executable in the 57 months and 64 months, respectively.

Valuation

BHEL reported topline growth, but posted a loss after tax due to higher cost of sales. We believe a pick-up in the industry segment, rising order inflow, strong pipeline, and rising government expenditure in favorable sectors are expected to drive the company’s performance in the long run. However, cost pressures, posting net loss for the third consecutive quarter and recent significant jump in the stock price indicate that the stock is trading at higher valuation. Hence, we downgrade our rating to SELL on the stock with a rolled forward target price of Rs. 203, based on 68x FY26E adjusted EPS.

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