BHEL: Some reduction in slow moving orders

SC order in favour of BHEL, Tangedco will result in monetisation of Rs 7,800 crore worth of projects

One of major overhangs on BHEL (Bharat Heavy Electricals Ltd) was its heavy list of slow-moving orders worth Rs 50,000 crore. These projects account for over 40 per cent of total order book (Rs 1,08,000 crore). In June quarter, the company had assured its investors it expected progress in at least three major projects, Yadadri, Manuguru, and Ennore, totalling Rs 30,000 crore. But, the Street wasn’t confident. Now, things seem in favour of BHEL, with the Supreme Court on Tuesday ruling in favour of Tangedco (Tamil Nadu Generation and Distribution Corporation) and BHEL in the petition filed by Madras High Court (on behalf of its appellants) for constructing 2x660 megawatts (Mw) in Ennore.

CLSA, on Wednesday, upgraded its recommendation on BHEL from ‘sell’ to ‘buy’. “The order improves execution visibility of the second-largest project (of BHEL),” the brokerage said, increasing its target on BHEL from Rs 155 to Rs 164. The Ennore project is estimated at Rs 7,800 crore and represents 15 per cent of slow-moving projects. Abhineet Anand of SBI Capital Securities adds the verdict will improve the order book visibility. The stock surged 3.8 per cent on Wednesday.

In May, progress was made with the Yadadri project (worth Rs 17,950 crore) and environment clearance is likely this financial year. Similar progress is expected in Manuguru project (Rs 5,000 crore). With this, only some major private sector projects such as Monnet Ispat and Visa Power (amounting to Rs 5,000 crore) would remain slow-moving projects for BHEL. Also, analysts estimate the three slow-moving projects have the ability to push up profit by 10-15 per cent, resulting in 30-35 per cent revenue growth in FY18. This could reverse the declining revenue growth in FY14-16.

That said, while the revenue visibility is improving. BHEL’s stock has a long way to go to its year-ago Rs 250-280 levels. “From here on, the Street will closely monitor the progress made on its order inflow expectation of seven gigawatts in FY17”, says Rohit Natarajan of IDBI Capital. If BHEL meets its order inflow target in FY17, that could help it win back the faith of investors. At present, nine of 12 analysts polled by Bloomberg in October (excluding CLSA) have a ‘sell’ on BHEL; rest a ‘hold’ (average target price Rs 131.4). Analysts say if BHEL can demonstrate five-eight per cent revenue growth in Q2FY17 and maintain positive outlook for its order book, its stock price could see some rerating.