Why Is JM Financial Bullish On The BHEL Turnaround?

The government of India (GoI) has launched an Offer for Sale (OFS) in Bharat Heavy Electricals Ltd (BHEL). The OFS floor price is set at ₹254/share.

Usually, such large-scale divestments (process of selling off subsidiary investments) lead to temporary price corrections. However, JM Financial (a brokerage firm) seems to be viewing this as a major structural opportunity.

The brokerage has maintained its "Buy" recommendation. It is projecting a robust target price of ₹355/share (a 40% upside). The basis of this conviction is a huge order book of Bharat Heavy Electricals Ltd (BHEL). Analysts expect a 20% compound annual growth rate (CAGR) in revenue and a 98% CAGR in net profit between FY25 and FY28.

India’s Thermal Power Turnaround

BHEL’s business narrative has considerably shifted over the last two years. Earlier, the sector witnessed a long period of stagnation. But now, the thermal power sector is witnessing a revitalisation. This transformation seems to be the main catalyst for the company's growth. Here are the major points of transformation for India’s thermal power ambitions.

• Aggressive Coal Roadmap - India has set a high target of reaching 340 GW of coal-fired capacity by 2047. Thermal power remains essential for India's basic energy needs, despite the shift toward renewables.

• Massive Capacity Addition - To maintain its industrial growth, India would require an estimated 170 GW to 180 GW of new thermal projects. This can create a multi-decade runway for equipment manufacturers like BHEL. Furthermore, BHEL has signed a strategic Memorandum of Understanding (MoU) with the Ministry of Heavy Industries. The MoU aims for a ₹33,700 Cr. thermal power production target.

• The Tendering Wave - There is 97 GW targeted capital expenditure (capex) addition for FY34 in the offing. Out of this, almost half has already been ordered. Also, currently, a major portion is under the tendering process. BHEL is a dominant player in the thermal power space. So, it usually secures a major share of these contracts.

• Supply Chain Revival - After a multi-year pause in thermal ordering, the domestic supply chain ecosystem is now being revived. BHEL is leveraging this momentum to speed up its execution capabilities. Thus, the company is ensuring that newer projects can be completed more efficiently.

So, the thermal capital expenditure cycle is beginning to peak. But can BHEL maintain its market dominance against emerging competition?

How Is BHEL Future-Proofing Its Business?

Coal-fired power remains the major portion of BHEL's current earnings. Now, the company is strategically diversifying into high-tech, future-ready segments. Here is how BHEL is making its business future-proof.

• Nuclear Energy Leadership - Currently, BHEL is the only domestic manufacturer of Indian nuclear turbine generator sets. The government is targeting increased nuclear capacity. Thus, BHEL is perfectly positioned to capture this high-margin market.

• Coal Gasification Breakthroughs - The company has recently secured a major order-book in coal gasification. These orders include a high budget syngas purification plant. This technology is important for reducing India's dependence on imported chemicals and fertilisers.

• Transmission and Defence - India is already utilising BHEL’s expertise in high-voltage transmission and heavy engineering in the defence and transportation sectors. The non-power segment is becoming a vital revenue pillar, from high-speed locomotives to advanced naval equipment.

• China-Plus-One in Equipment - Easing of restrictions on Chinese components might benefit BHEL in the long-term. BHEL can lower the input costs for specialised parts and maintain its role as the lead domestic integrator. Thus, the company could see a further boost in its operating margins.

Read more - Govt to Sell 3% Stake in BHEL

Investor Takeaways

From a valuation perspective, the OFS floor price seems to be offering a "valuation comfort" that is hard to ignore. JM Financial believes that the execution of high-margin orders would kick in soon. So, consequently, the market would re-rate the stock. On that basis, the stock can gradually move towards a higher multiple of around 30× FY28 earnings.

Investors can carefully analyse the combination of a record order book, margin recovery, and expansion into nuclear energy to check the OFS potential.

Source:

MSN

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