High-speed train orders: Too little, too far for BHEL

Bullet train project may not be enough to move the needle for firm, say analysts

As the euphoria over high-speed train orders settled, the BHEL stock, too, on Friday gave up all the gains it clocked a day earlier. And there are reasons for this. If analysts are to be believed, there is not much change expected in BHEL's prospects in the near-term, and secondly, the high-speed train orders may not be enough to move the needle.

The stock had gained 3.8 per cent to Rs 137.40 on Thursday, compared to Wednesday's closing price of Rs 132.55. On Friday, it fell 3.9 per cent to close at Rs 132. The street optimism had increased on Thursday, as rolling stock for the Mumbai-Ahmedabad bullet train project will be sourced from a joint venture between BHEL and Kawasaki of Japan.

This opportunity, however, may not be big enough to substantially improve BHEL's near-term prospects. For one, the project is estimated to be completed by 2023. Analysts at Nomura believe the 2023 timeline will be extremely difficult to meet given the complexities involved in constructing the project.

Further, in a note, Kotak Securities' analysts peg the business opportunity for BHEL at Rs 1,500 crore. This is less than five per cent of BHEL's estimated FY18 revenue of Rs 31,500 crore.

The visibility in the power business, which remains core to BHEL's prospects, also remains subdued, which is keeping street sentiment low. BHEL's order inflow remains under pressure, which is posing risks to its medium-term revenue visibility. During the June quarter, for instance, order inflow declined 44 per cent year-on-year to about Rs 1,800 crore. Consequently, order book (pending orders) was down six per cent year-on-year to Rs 101,380 crore.

Analysts at Jefferies, post results, had said that the decline in order book does raise concerns on medium-term revenue visibility unless there is a sharp expansion in market pie. While the management had maintained that the industry pipeline is between 10,000-12,000 GW, and BHEL is L-1 (lowest bidder) for orders worth Rs 25,000 crore (including NTPC's 2400 MW Patratu power plant, 660 MW Panki plant and 660 MW Bhusawal plant), Jefferies said that these were needed to meet their annual expectations of Rs 36,200 crore order inflows.

However, there is hope for BHEL going ahead, and scope for sentiments to improve. Analysts at Motilal Oswal Securities say that new orders worth Rs 25,000 crore are expected to be finalised in the near-term. The other positive is that executable orders (from BHEL's existing order book) have also increased from Rs 6,250 crore to Rs 7,600 crore.

Also, for flue gas desulphurisation (FGD) systems for power plants, NTPC has floated tenders for 11 projects (17,000 MW) worth Rs 18,000 crore, say analysts who expect orders for another for seven projects (7GW) worth Rs 7,000 crore to be floated soon. If BHEL can bag a sizeable chunk of these orders, it can boost the company's financials and market sentiments.