Ripples Advisory, BHEL’s cheap valuation make its shares attractive, but risks remain
There are risks from the power sector that is Bharat Heavy Electricals Ltd’s mainstay
Bharat Heavy Electricals Ltd’s (BHEL’s) stock price has fallen by almost a fifth since January. Weak revenue growth, high receivables (customer dues) and low customer advances have taken the sparkle off this state-owned Maharatna. At the current market price, its price-earnings multiple has tumbled to around 14 times estimated FY19 earnings, from 20 times until a few months ago. Strangely, even the 74% spike in its FY18 order flows failed to enthuse the Street, due to concerns about sustainability.
The question is—does the cheap valuation, which is lower than a decadal average, build a case for investors to buy into BHEL?
Sentiments on the Street are mixed. Some industry experts believe that new areas such as environmental compliance and refurbishing old power plants can generate order flows for the company in the years ahead. This could keep the annual run rate at a healthy ₹ 40,000-50,000 crore.
BHEL’s diversification into other areas such as railways will shore up revenue prospects too. A Nomura report dated 19 June that has upgraded the stock to “Neutral” from “Reduce”, says “executable order backlog (book) has jumped 50% in FY2018, though the overall order backlog may be up only 12.3%.
Also, recent orders have been procured at higher margins. Hence, some brokerage firms supportive of BHEL’s prospects are forecasting an Ebitda (earnings before interest, tax, depreciation and amortization) margin increase over the next two years.
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