homebusiness Newscompanies NewsNearly all analysts have a sell call on BHEL that's gained over 40% — here's why
business | Dec 12, 2022 2:23 PM IST

Nearly all analysts have a sell call on BHEL that's gained over 40% — here's why

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As of September 30, 2022 BHEL’s order book stood at Rs 1,06,376 crore. In the July-September quarter on a segment wise basis in the order book power contributed over 84 percent, Industrial orders accounted for over 12 percent and Exports accounted for over 4 percent.

Even as the shares of Bharat Heavy Electricals Limited (BHEL) showed a spike of at least 40 percent in the year so far, the stock still has more sell calls from analysts. One of the primary reasons being that company’s weak performance in the July-September quarter as compared to estimates.

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When we talk about numbers for the second quarter of financial year 2023, BHEL’s gross margins declined 350 basis points from the corresponding period a year ago and the operating margin during the quarter declined and stood at -10.52 percent, as compared to being at -4.71 percent in the corresponding period a year ago.
The standalone net profit stood at Rs 10.3 crore while a CNBC-TV18 poll estimated the net profit for BHEL to be at Rs 60 crore. In terms of Revenue for the July-September quarter the number stood at Rs 5,202 crore meanwhile the CNBC-TV18 poll predicted the revenue for the quarter at Rs 5,819 Crore.
The major account of this was given to the execution of legacy orders. Nalin Shinghal, CMD, BHEL told CNBC-TV18 that the older orders' execution, competition and hike in material cost impacted the margin.
“So gross margins where we are looking at Legacy orders as well as a huge increase in the material cost - steel prices, copper prices, cement prices, which have all gone through the roof. So what is really happening is that we have these older orders, which are very competitive, there are delays, and there are material cost increases,” said Shinghal
He further added that for the next year or so the issues with margin will continue.
“The orders which are now coming in - typically, in the second and third year, they start kicking in. So that is when the margins should start coming back. We are now in a much more competitive sort of market than we have ever been. So we may never get back to the old gross margins. But yes, we will certainly get substantial customers,” said Shinghal.
As of September 30, 2022 BHEL’s order book stood at Rs 1,06,376 crore. In the July-September quarter on a segment wise basis in the order book power contributed over 84 percent, Industrial orders accounted for over 12 percent and Exports accounted for over 4 percent.
Why are analysts cautious on the shares of BHEL?
Despite shares of BHEL rewarding shareholders with gaining 40.73 percent only analysts are cautious on the stocks. DAM Capital is bullish on the shares of BHEL while global brokerage firm Goldman Sachs is Bearish on the company shares.
DAM capital is positive for BHEL because of the company’s outlook towards coal-based power plants.
Singhal also told CNBC-TV18 that coal gasification is going to be a focus area for BHEL moving forward. “We have already signed an MOU with Coal India for our ammonium nitrate plant, another one with Neyveli Lignite for coal gasification and integrated gasification combined cycle (IGCC). So, going forward we are very bullish on that, that is a very major area for us.+ve outlook on ordering for coal- based power plants,” he added.
Meanwhile the company has also pegged market at 4-5 giga watt of thermal ordering every year till FY27(E)
According to DAM capital, the coal gasification segment has less competition and it can aid BHEL to get a better gross margin.
Meanwhile BHEL expects to bag coal gasification order worth Rs.8000 crore from Coal India to be finalised by FY23E
Goldman Sachs has a sell call on the shares of BHEL with the target price at Rs 30. According to the brokerage firm, the company’s weak results in the July-September quarter makes the path to profitability still uncertain for BHEL.
“Fundamental issues, are a lack of opportunities on thermal power (management highlighted 4GW of annual opportunity) and diversification away from its key segment is likely to be gradual—both issues make BHEL vulnerable to weak profitability,” said the brokerage firm in a note.
Meanwhile Nomura has a neutral rating on the shares of BHEL with the target price at Rs 79. The brokerage firm is also expecting positive returns for the company with thermal orders.
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According to the brokerage form, tendering momentum and working capital moderation are key triggers for BHEL. Slow execution, delay in gross recovery and aggressive bidding can be the key challenges to growth in margin.
BHEL shares are trading at Rs 85.6, up 0.12 percent from previous close on the BSE.
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