No brightness in BHEL outlook yet

Total operating revenue grew just 1.8% year over year 5,202 crore. Gross margin compression was also disappointing due to commodity cost inflation, higher working capital and higher receivables. Shares of Road Rejected and BHEL fell 5.6 per cent in the last two trading sessions.

Amid the gloom, the much-awaited Talcher Thermal Power Plant order placed by NTPC Ltd offered some comfort as it boosted BHEL’s orders in the second quarter. In the post earnings call, the management said orders for coal-fired power plants are showing a strong revival after four years. According to Investec, thermal power plant orders are likely to resume with an increase in the peak power shortage rate during summer and with no viable storage solution for renewables available.

Besides this, the management was also upbeat on the railway segment and said that BHEL would bid for three trainset tenders including locomotive tenders. The company aims to tap opportunities in sectors such as steel and refineries. The management reiterated that under its FY22-27 strategic plan, it will focus on various initiatives including cost effectiveness and increasing market share in traditional segments.

However, the outlook for BHEL stock is muted as a significant turnaround in key metrics of the company is not going to happen overnight and depends on several factors. There are concerns about the pace of improvement in execution and gross margin. Analysts at Kotak Institutional Equities said in a report on November 14, “The company needs to grow topline at least 20% or higher (assuming improvement in gross margins) to report profit after tax break-even. ).

Analysts also said that the 2X660 MW Talcher order win would start getting reflected in revenue in a meaningful way in 18-24 months, but since BHEL has bid aggressively for it, gross margin recovery will take longer.

BHEL is diversifying into non-thermal segments such as railways, transport and defence, but progress there has been very slow and is still in its infancy. Analysts say that some segments like nuclear have longer order periods, while in others, an increase in order volume may not necessarily lead to gross margin accretion.

Meanwhile, hopes of revival in thermal power capex have boosted sentiments for BHEL stock in FY23, with the shares gaining 42.5% so far. However, investors should not get carried away by this. The competitive intensity is high. Moreover, the returns of the stock have been measured at 10% in the last one year.

Amit Anwani, Research Analyst, Prabhudas Lilladher said, “A large order has helped the company’s order book in H1 FY23, but challenges remain on the execution front, which is lower than expected.” BHEL’s order flow in Q2 stood at approx. 12,000 crores, to which Talcher contributed 8,740 crore including taxes.

Anwani said that there has been a structural change in the power sector with emphasis on renewable energy and BHEL has not been able to come up with a strategy to navigate this change and thereby improve its financial performance. “For the stock to see a meaningful re-rating, it would have to fall into place,” he said.