BHEL earnings growth may average 43% over FY15-17

Analysts expect uptick in stock price to last as power equipment ordering picks up

India’s power sector might be in a mess, but shares of the country’s largest power equipment manufacturer Bharat Heavy Electricals (BHEL) have rallied. The firm’s shares are up 10 per cent over the past month and 18 per cent over three months. While the consensus view on the stock remains negative, some analysts see value in the company as it is poised for an earnings upgrade.

Given that BHEL is a beneficiary of any pick-up in capital expenditure in the power sector, it is strange that some analysts believe the company's earnings would improve materially over the next couple of years, especially since its revenues and profits have dwindled over the past four years. In FY14, BHEL’s revenues contracted 19 per cent and in FY15, it is expected to contract by 20 per cent. However, the downward spiral is set to reverse.

In a note, Citi says after a 35 per cent decline in earnings over FY12-15, BHEL would report a compounded annual growth rate of 43 per cent in earnings per share over FY15-17. The stock is also under-owned by domestic and foreign investors, which means any positive development in the sector will see buying.

Most analysts who had expected the weak ordering to continue for another two years are surprised to see the formation of the new state of Telangana has proved to be a black swan event for BHEL. Citi says: “The creation of Telangana and the consequent good fortune of BHEL of signing an MoU (memorandum of understanding) for 6 Gw is a black-swan event, which has arrested the downcycle for the company.”

The company has already also won orders worth Rs 14,100 crore in the first half of FY15. The Telangana government has signed an agreement of 6 GW of orders, of which Manuguru (4X270 Mw) and Kothagudam (800 Mw) is expected to come up in 24 and 36 months, respectively. Analysts assume 1.5 Gw of these orders can be booked in the next six months. The management has indicated that 1,880 Mw of these orders from Telangana can be booked in the second half of FY15. The company expects ordering to remain strong in FY15 and FY16.

Motilal Oswal believes while the timing of capex recovery in the sector remains a key variable, the next 12-18 months could see project awards. In FY14, project awards declined to 6 Gw from 10 Gw per annum in FY12 and FY13. The brokerage believes initial signs of recovery with 20 Gw projects likely to be awarded over 12-15 months.