Stock in Action: Bhel Ltd.

Movement of the day:

The Power Behind the Surge

BHEL's recent climb is attributed to its major win in securing an order for India's largest capacity hydro project, a substantial 2,880 MW multipurpose project. The project, located in Roing, Lower Dibang Valley district of Arunachal Pradesh, was secured through international competitive bidding (ICB). Notably, the order was placed by NHPC, underscoring BHEL's prowess in the power sector.

BHEL's Strategic Moves

Critical equipment for this colossal project is slated to be manufactured at BHEL's plants in Bhopal, Bengaluru, Jhansi, and Rudrapur. Execution activities on-site will be spearheaded by the firm's power sector - eastern region division, based in Kolkata. This strategic move aligns with BHEL's focus on diversification across various segments, including railways, defence, nuclear, and hydro.

Expert Perspectives on BHEL's Trajectory

Industry experts or veterans see potential in BHEL's long-term trajectory. Despite the awaited disclosure of the order size, the execution timeframe for the project is anticipated to span 9-10 years. Analysts highlight a positive outlook, pointing towards a revival in thermal power orders and the company's strategic diversification efforts.

Contrasting Views: A Balanced Approach

While the bullish sentiment surrounds BHEL's recent achievements, there are varying perspectives among experts. A veteran expert suggests a cautious stance, assigning a 'reduce' rating on the counter with a target price of Rs 67. The expert emphasizes the current PE ratio of 53.7 times/30.5 times FY24/25E as a consideration for potential investors.

Expert’s Optimistic Take

Contrastingly, another set of experts, as represented by veterans, initiates coverage on BHEL with a 'buy' rating and a target price of Rs 165. The brokerage envisions a robust future for BHEL, anticipating a revenue/EBITDA/PAT CAGR of 17 percent/76 percent/91 percent, respectively, over FY23-26E. This optimistic outlook is underpinned by expectations of healthy ordering, improving execution, and the benefit of operating leverage.

Technical Insights: A Momentary Pause?

From a technical perspective, BHEL stock exhibits a 14-day relative strength index (RSI) of 82.5, placing it in the overbought zone. This suggests a potential for a pullback, signalling a momentary pause in the stock's upward trajectory.

Financial Summary:

Quarterly Financial Analysis:

BHEL Ltd.'s sales exhibit significant volatility, with fluctuations and inconsistent growth trends over the observed quarters. While recent recovery is positive, sustained growth may require strategic initiatives to address potential challenges in the business landscape.

Annually Financial Analysis:

1. Sales Trend: BHEL's annual sales witnessed a declining trend from 2012 to 2020, with a subsequent recovery in recent years, reaching 23,365 in March 2023.

2. Operating Profits Fluctuation: Operating profits fluctuated over the years, experiencing a significant dip in 2015 and 2020 but showing signs of recovery in the subsequent years, reaching 807 in March 2023.

3. Net Profits Resilience: Despite operational challenges, BHEL demonstrated resilience in net profits, with occasional downturns but a positive trajectory overall, reaching 477 in March 2023.

Valuation Metric:

PE ration since the company is listed as of now trading low.

Shareholding Pattern

Majority of holdings of the entity belong to the promotors.

EV/EBITDA

Current scenario of multiple is that A higher EV/EBITDA ratio suggest positive investor sentiment, expectations of strong future earnings growth, and optimism about the company's prospects.

Strengths:

1. Consistent Dividend Payout: The company has demonstrated a commendable commitment to shareholders by maintaining a healthy dividend payout of 20.1%, providing investors with a steady income stream.

 2. Improved Debtor Days: There is a positive trend in debtor days, showcasing an enhancement from 62.0 to 48.9 days. This indicates an improvement in the company's efficiency in collecting receivables.

Weaknesses:

1. Low Interest Coverage Ratio: The company exhibits a weakness in terms of a low interest coverage ratio, suggesting potential challenges in meeting interest obligations. This warrants careful attention to financial management.

2. Declining Sales Growth: Over the past five years, the company has experienced a concerning sales growth of -4.11%. This indicates a challenge in expanding revenue, which may require strategic interventions for revitalization.

3. Low Return on Equity (ROE): The company faces a weakness in generating returns for its shareholders, reflected in a low return on equity of -2.25% over the last three years. Improving ROE is crucial for enhancing shareholder value.

4. Questionable Tax Rate: The company's tax rate appears to be low, raising questions about its tax management strategy. This requires further scrutiny to ensure compliance and transparency.

5. Inclusion of Other Income in Earnings: Earnings include a significant other income of Rs. 557 Cr. While other income can be legitimate, its prominence in earnings should be evaluated for a comprehensive understanding of the company's financial health and operational performance.

BHEL's recent triumph in securing a substantial hydro project order has undeniably fuelled its recent stock surge. However, as experts offer divergent views, investors must navigate this surge with a balanced perspective. 

The company's strategic diversification, coupled with contrasting expert opinions, adds an element of complexity for those eyeing the stock. Whether the recent highs are sustained or a pullback is imminent, BHEL's journey in the coming months promises to be one to watch for investors seeking both opportunities and risks in the dynamic world of finance.