CLSA Maintains Caution on Bharat Heavy Electricals Ltd (BHEL)
Recently, CLSA has reiterated its underperform rating for Bharat Heavy Electricals Ltd (BHEL:IN) stock, setting a steady price target of INR 189.00. This decision stems from several factors impacting the market positioning of BHEL.
Concerns Over Market Positioning
CLSA noted that one of the catalysts for BHEL's previous entry into global passive indices is no longer valid. The news of Larsen & Toubro (L&T) entering the thermal power equipment industry raises concerns about BHEL's sustained market dominance. This could lead to increased competition, further complicating BHEL's operational landscape.
Order Inflow Growth Amidst Valuation Concerns
In a positive light, the firm did acknowledge a staggering 77% year-over-year growth in order inflow for BHEL, alongside a 40% increase in its backlog. However, despite these impressive figures, CLSA highlighted that the stock's current valuation appears steep at 40 times the FY26CL earnings. Such a valuation raises questions about the sustainability of BHEL's performance.
Operational Improvements Not Enough
While BHEL has made operational strides, including a notable 347 basis point increase in gross margins during the second quarter of FY25, the analyst warns that these improvements may not be sufficient. The 40% growth in backlog has contributed to a turnaround, transitioning from a period of losses to reporting EBITDA profits. Despite these operational advances, the broader outlook for BHEL's thermal business remains pessimistic beyond FY30.
Long-Term Implications for BHEL
Despite showing notable recovery in fossil fuel orders, aligned with India's energy security focus, the future trajectory for BHEL in the thermal sector looks challenging. The stock has shown signs of underperformance compared to the broader Nifty index, trailing by a significant margin of 11% to 24% over the last one to six months.
Valuation and Market Challenges Ahead
In conclusion, while BHEL has made commendable progress in its operations, CLSA's analysis paints a picture of cautious optimism. The 40 times projected earnings for FY26CL are considered expensive, posing dangers amid market fluctuations. The combination of external competition from entities like L&T and internal performance metrics contributes to a nuanced risk outlook for current and potential investors.
Frequently Asked Questions
What is CLSA's current rating for BHEL?
CLSA has maintained an underperform rating on BHEL.
What is the price target set by CLSA for BHEL?
CLSA has set a price target of INR 189.00 for BHEL.
Why is BHEL’s stock valuation considered high?
BHEL's stock valuation is marked at 40 times the FY26CL earnings, which is viewed as steep by analysts.
What operational improvements has BHEL achieved?
BHEL reported a 347 basis point increase in gross margins and a significant growth in order inflow and backlog.
How has BHEL performed relative to the Nifty index?
BHEL's stock has underperformed the Nifty index by 11%-24% over the past one to six months.
