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We maintain our non-consensus outperform rating on Bharat Heavy Electricals (BHEL) and raise our share price target to Rs 205 (Rs 182 earlier) given improving order inflow visibility and emerging tailwinds in the power sector. We value the stock at 1.5x price-to-book (P/B) FY14 BV. Historically, BHEL has traded at an average P/B of 1.5x during cyclical inflection points (FY03-04).
Bharat Heavy Electricals Ltd (BHEL) seems well-placed to beat our FY14 power order inflow estimate of Rs 18,000 crore. It has won orders worth Rs 6,300 crore in H1FY14, is L1 for Rs 10,500 crore and favourably placed in Rs 5,000 crore. Projects where BHEL is L1 are Darapalli 1,600 megawatt (MW) STG, 206 MW HEP, and the 700 MW Pranhita Andhra Pradesh irrigation project.
Several large projects are to be finalised in the next 12 months and they could generate orders worth R50,000 crore for BHEL, in our view.
Planned UMPPs and coal block auctions could improve order inflow visibility, in our view. The two UMPPs (ultra mega power projects) in Odisha and Tamil Nadu have attracted many bidders given the power ministry’s recent change in bidding norms. We expect these UMPPs (total capacity of 8GW) to order power equipment in FY16.
The power sector’s improving fundamentals are likely to alleviate investor concerns on receivables, order inflows and execution, in our view. BHEL is likely to be a major beneficiary of emerging tailwinds in the power sector. Some recent positive developments are: 1) SEBs’ financial restructuring, 2) coal block auctions, 3) allowing fuel pass-through for use of imported coal, and 4) CERC’s tariff judgment.