New orders should boost BHEL's prospects; analysts have mixed views

There’s been a surge in orders for capital goods companies in the January to March quarter of the 2022-23 financial year (Q4FY23), with order flow (excluding L&T) hitting Rs 56,000 crore -- which is an 8-year high. With the exception of defence contracts, order flow was at Rs 16,000 crore, which is still a multi-year high while defence contracts of around Rs 40,000 crore, rose by over 12 times year-on-year (YoY).

One of the sectors which saw large orders was the Railways with tenders for 200 Vande Bharat trains. A consortium of Bharat Heavy Electricals (BHEL) and Titagarh Wagons has received an order for 80 Vande Bharat trains, in one of the biggest awards under this tender, valued at more than Rs 23,000 crore. The order value comprises the supply of train-sets for Rs 9,600 crore and the balance is for maintenance for a period of 35 years.

The consortium is to manufacture, test, commission and supply 80 energy-efficient trains with design speed and normal operating speed of 176 kilometres per hour (kmph) and 160 kmph, respectively.

BHEL is a major supplier of rolling stock electricals to the Indian Railways and it will supply the propulsion system, that is insulated-gate bipolar transistor or IGBT-based traction converter-inverter, auxiliary converter, train control management systems, motors, transformers, and mechanical bogies.

Titagarh is the rolling stock manufacturer for Indian metro trains and Indian Railways and it will build the mechanical coaches. The integration, testing, commissioning and maintenance shall be done jointly.

BHEL has also entered into a Memorandum of Understanding (MoU) with Nuclear Power Corporation of India Limited (NPCIL) to jointly pursue opportunities in the area of Nuclear Power Plants based on Pressurised Heavy Water Reactor (PHWR) technology. BHEL is the only Indian company to be actively associated with all the three stages of the Indian Nuclear Programme (first stage PHWRs, second stage of fast breeder reactors and third stage of advanced heavy water reactors), for over five decades. The company has the capability to design, engineer and manufacture almost the entire range of required equipment for a nuclear plant.  

Given a large order backlog as well as the strong inflows in Q4, BHEL should do well. It’s Q4 performance will, however, probably declare lower profit after tax (PAT) in YoY terms, even though Ebitda (earnings before interest, tax, depreciation and amortisation) should be up by double-digits. Margin pressures have not entirely faded since industrial metals are still highly priced, despite reacting from early 2022 levels. BHEL registered losses at both Ebitda and PAT levels through first half of FY23 before seeing a turnaround. Write backs on provisioning of Rs 840 crore would contribute to the Q4 profitability.

The capital goods major has seen its share price rise from around Rs 55 a year ago to the current Rs 72. Some brokerages are still negative on the stock and one analyst offers a target valuation of Rs 36, implying a big downside. Other analysts are positive with one target price of Rs 76.

Titagarh is a major beneficiary of an expanding Railways Budget. It’s presence in metro rail, train sets, and propulsion systems offer broad growth opportunities. It is trading at a current price of Rs 289, and one analyst offers a price target of Rs 346 in a year.