Q1 disappointing, but BHEL's prospects likely to improve from Q3FY26

The performance was due to poor execution and on account of legacy fixed-price contracts in the power segment (where legacy contracts amount to 71 per cent of power segment revenues)

The performance of Bharat Heavy Electricals Ltd (Bhel) for the first quarter of 2025-26 (Q1FY26) was disappointing with revenue at ₹5,500 crore, Ebitda loss at ₹540 crore, and a net loss of ₹450 crore (₹210 crore loss in the year-ago period). Ebitda stands for earnings before interest, taxes, depreciation, and amortisation. This performance was due to poor execution and on account of legacy fixed-price contracts in the power segment (where legacy contracts amount to 71 per cent of power segment revenues).

 

But the order inflow (OI) is strong. Legacy backlog is nearing completion, which will mean better profitability in future. The OI stood at ₹13,400 crore, taking the order book (OB) to ₹2 trillion (over 7 times the trailing 12 month, or TTM, revenue). Given improved execution, there should be a sharp turnaround.

 

The power segment drove Ebitda losses, with the industrial segment showing recovery. Power revenues were flat despite 46 per cent uptick in related order backlog. There was 17 per cent year-on-year (YoY) growth in industrial systems, led by execution of locomotive and high-voltage direct current (HVDC) contracts. The power segment had 13 per cent negative Ebit margin. The PAT (profit after tax) loss included ₹211 crore loss on provisions for payments receivable for over three years from Suratgarh 7 & 8 Project and NEC Sudan.

 

OI grew 50 per cent Y-o-Y over a low base, with 4 per cent quarter-on-quarter (Q-o-Q) increase in order backlog. Inventory has increased over 20 per cent Y-o-Y and receivables have improved 10 per cent Y-o-Y as share of sales, but there’s no information shared on split or quantum of trade receivables. Movements in provisions are also not available. 

 

Consolidated net revenue is ₹5,490 crore, flat Y-o-Y, with an Ebitda margin of negative 9.8 per cent (versus negative 3 per cent in the year-ago quarter). Gross margin is stable Q-o-Q at 29 per cent in Q1FY26. Ebitda margin contracted to negative 9.8 per cent from negative 3.1 per cent in Q1FY25.

 

The total OB stands at ₹2.044 trillion, which may rise to ₹2.25 trillion by FY26-end. Of this, ₹1.6 trillion is in the power segment, while ₹42,700 crore is industry & exports. As project mix improves with price variation clauses in new projects, Ebitda margin may rise to positive double digits by FY28. In Q1FY26, the power segment reported revenue of ₹3,900 crore, down 6 per cent Y-o-Y, while industry reported revenue of ₹4,100 crore, up 17 per cent Y-o-Y. The Ebit margin for power segment was negative 13 per cent and for industry was positive 19.3 per cent (4.7 per cent in Q1FY25).

 

Bhel may see improvement from Q3FY26 due to the schedule of major projects under construction. OI in Q1FY26 stood at ₹13,400 crore (₹7,600 crore from power and ₹5,800 crore from industry) versus ₹9,500 crore in Q1FY25.

 

The government has revised the target for thermal capacity expansion from 80 Gw to 100 Gw by FY32. Of this, 32 Gw of projects are under construction while an additional 18 Gw of projects have been awarded and are yet to commence construction. Hence, orders for the remaining 50 Gw are anticipated over the next two-three years, with over 10 Gw in the tendering stage. Bhel may book orders of up to ₹60,000-70,000 crore during FY26 since it is very competitive in thermal power. The gross margin and Ebitda margin could improve dramatically, with the latter rising to above 10 per cent by FY28. If execution improves, revenue should grow at close to 30 per cent per annum. Risks include slow execution and lower OI.

 

Analysts have cut earnings per share (EPS) projections for FY26 and valuations have been downgraded, with the stock correcting sharply by nearly 5 per cent to close at ₹227.80 on the BSE on Thursday. However, Bloomberg indicates that some analysts see an upside till around the ₹335 mark.