Slow turnaround in sight for BHEL

Building on a solid order pipeline, shares of Ltd (BHEL) have shot up 139% in the past year, despite persistent concerns about mounting receivables, elevated debt and strained working capital. The company’s main issue is that payment terms in some ongoing projects are highly skewed towards the latter stages.

Other problems include slow execution, delays, and milestone linked payments. In the September quarter, BHEL’s trade receivables rose 13% year on year to 7,493. However, things may take a turn for the better. BHEL expects to complete projects totalling 20 GW in the next 12 to 18 months. This has given analysts at JM Financial Institutional Securities confidence that the stress on receivables will ease from March 2025.

“The decrease in debtor days along with better payment terms (minimum 10% advance) will translate into 44% compound annual growth rate (CAGR) in the cash balance during FY23 26 versus around 10% CAGR during the preceding five years," the analysts explained. Some analysts also foresee a potential turnaround in BHEL's ordering cycle from FY24.

Its outstanding order book stood at 1.14 trillion as of the end of September 2023. “We foresee BHEL’s total order intake surging to 1.8 trillion during FY24 26, which is nearly thrice the orders in the three years preceding FY24," Antique Stock Broking wrote in a report. This optimism stems from the anticipation of large orders such as the 3x800 MW Talabira project and the 2x800 MW Koderma project, among others.

BHEL has been the sole bidder in some large thermal projects of late, which has boosted investors’ confidence. The power sector (which includes thermal orders) and the industry sector accounted for 72% and 24%, respectively, of BHEL’s outstanding order book in Q2, with exports forming 4%. In the coming years, the share of thermal is expected to drop.

In this backdrop, BHEL's expansion into scalable non thermal power segments like Vande Bharat trainsets, pumped hydro storage plants, nuclear power, defense business, and coal gasification, offers some comfort. JM Financial expects BHEL’s revenue, Ebitda, and profit after tax to compound annually by 35%, 127%, and 145% over FY23 26 supported by healthy ordering, improved execution and the benefit of operating leverage.

The brokerage has valued BHEL’s stock at 225 on a sum of the parts basis, giving the industry segment a price to earnings multiple of 40 times estimated FY26 earnings and valuing the power business on a discounted cash flow basis. On Friday, BHEL’s shares closed at 195.80. Despite its streak of order wins, the company’s turnaround will depend to a large extent on execution..