We raise our target price for Bharat Heavy Electricals Ltd (BHEL)to Rs 205 (from Rs 182) given improving order inflow visibility and emerging tailwinds in the power sector.
Order inflow visibility for power equipment could improve given the planned UMPPs in Tamil Nadu and Odisha, and the coal block auctions to private players.
The power sector’s improving fundamentals are likely to alleviate investor concerns on receivables, order inflows and execution, in our view. We maintain our non-consensus OP rating at target price of Rs 205 (1.5x PBR March-14 BV). Historically, BHEL has traded at an average PBR of 1.5x during cyclical inflexion points.
BHEL seems well-placed to beat our FY14 power order inflow estimate of R18,000 crore. It has won orders worth R6,300 crore in H1, is L1 for R10500 crore and favourably placed in R5,000 crore. Projects where BHEL is L1 are Darapalli 1,600MW STG, 206MW HEP, and the 700MW Pranhita Andhra Pradesh irrigation project.
UMPP-based orders likely in the medium term: 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.
Improving power sector fundamentals could alleviate investor concerns on receivables, order inflows and execution. Some recent positive developments are SEBs’ financial restructuring, coal block auctions, allowing fuel pass-through for use of imported coal and CERC’s tariff judgment.
We maintain our non-consensus ‘outperform’ rating and raise our target price to Rs 205 (from Rs 182). We value the stock at 1.5x PBR March ’14 BV. Historically, BHEL has traded at an average PBR of 1.5x during cyclical inflection points (FY03-04).