Reduce BHEL; target of Rs 264: Prabhudas Lilladher

Prabhudas Lilladher's research report on BHEL

BHEL reported revenue growth of 9.6% YoY with EBITDA margin improvement of 47bps YoY to -3.1% in Q1FY25. India's power sector outlook remains strong, with plans for ~80GW of thermal capacity additions by FY32. BHEL’s technical expertise positions it well to capitalize on it. BHEL was also appointed to jointly develop 800 MW thermal plant with NTPC in Budget 2024. Beyond thermal, BHEL's strategic diversification into high-growth sectors such as transportation and RE transmission augurs well for the company. It is poised to capitalize on key opportunities including supplying motors and propulsion systems for Vande Bharat trains, and advanced transmission equipment for substations and HVDC systems (12GW to be added by FY27). It is set to leverage its dominant market share of ~30% in the ~100GW of FGD project tenders. Further growth opportunities are present in the supply of strategic defense equipment.

Outlook

We believe 1) pickup in thermal power orders, 2) diversification into segments such as railways, defence, green hydrogen, coal gasification, etc., and 3) growing spares & services business augurs well for company in the long-term. However, execution pace and operational efficiency will be key monitorables. The stock is trading at a P/E of 88.5x/29.2x FY25/26E. We maintain ‘Reduce’ rating with an unchanged TP of Rs264, valuing it at a P/E of 25x FY26E (same as earlier.)

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