Q4 could be a turning point for BHEL

Order inflow has improved, new emission norms hold potential; questions on ability to rebound

BHEL (Bharat Heavy Electricals Ltd) has recovered 30 per cent from its 52-week low of Rs 90 seen last month. Many factors have helped it rebound. First, since January, BHEL has recorded order wins of 7,661 megawatts (Mw), mainly from power-deficient states. Orders from Telangana and Andhra Pradesh also helped.

Year to date, analysts at CLSA, while assigning an ‘outperforming’ rating, said new orders for power generation equipment grew 27 per cent year-on-year to 12,000 Mw in FY16.

They believe, demand for equipment points to a turn in the capital expenditure (capex) cycle after five years. BHEL is leader in the space, despite foreign rivals such as Doosan of South Korea. This is another positive.

Apart from order inflows, the recent tightening of power emission norms by the ministry of environment and forest also bodes well. The new norms, which have to be met within two years, require sharp reduction in emissions. Kotak Institutional Research says around 40,000 Mw of operating plants, with a life of 25 years or more, may have to be phased out starting FY18.

The brokerage says even if 5,000-8,000-Mw ordering from the phased-out capacity happens every year, added to a 5,000-10,000 Mw of regular ordering, the total opportunity for power equipment firms may increase to 10,000-18,000 Mw, starting FY18, representing a Rs 20,000-34,000-crore revenue potential for BHEL. While the company may benefit the most, Larsen & Toubro, Thermax Global, and Alstom India may gain as well. But, some analysts also believe gains may not accrue soon, as for old plants to be phased out and new ones to be set up, the industry will need more time, so an extension is more likely. Second, the industry is already running at 60-65 per cent capacity, which suggests that new capacities may not come up soon.

Results due on April 7 will be closely watched. Even as the share of super-critical orders remains steep, analysts hope for a turnaround in operating margins (five-eight per cent) in the March quarter, versus a loss in the first nine months of FY16. BHEL has secured a 110-Mw refurbishing order from Bihar, which should be executed at 12-15 per cent operating margins. Such orders are critical for margins.