Edelweiss Securities has given a reduce recommendation on Bharat Heavy Electricals (BHEL) with a target price of Rs 60.Shares of BHEL traded at Rs 74.8 around 1:50 pm on 26 June, 2019.
The brokerage has set a one-year horizon for the stock to hit the target price.
"We are downgrading BHEL to reduce/sector performer (from buy/sector outperformer) with a target price of Rs 60 PE of 12 times (40 per cent discount to capital goods valuations) to December 2020 EPS versus our earlier DCF-based target price of Rs 85," said the brokerage.
"We believe challenges pertaining to thermal power equipment market are unlikely to be resolved quickly, which would limit cash flow or return potential.
Besides, taking cognisance of a more steady profit and loss statement since 2017, we are changing the valuation methodology from DCF to P/E," the brokerage added.
As per the brokerage, displacement from renewable energy (RE) will limit thermal ordering to 6-7GW (25-30 per cent of installed base) even in case of 6 per cent power demand growth for the next seven years.
Setting up thermal capacity by central utilities to meet peak demand will be less profitable.
Weak balance sheet of SEBs limit their ability to sign fresh long term PPAs.
BHELs balance sheet and cash flow are unlikely to revive meaningfully with SEBs accounting for more than 50 per cent of receivables.
Overall, BHEL is unlikely to generate revenue growth beyond 68 per cent over five years, which would limit its returns structure, added the brokerage.
The brokerage expects BHEL to garner an additional Rs 10,000 crore worth of orders over the next three years from clean air technologies (Rs 7,500 crore in order book).
BHEL is also targeting opportunities in transportation with Kawasaki.
However, the brokerage does not anticipate significant revenue outperformance over twothree years from non-thermal avenues.
While BHELs OPM has stabilised over the past twothree years on the back of a pick-up in execution and peaking out of provisioning, the recovery of balance sheet and pick-up in thermal ordering seem far away.