Trading at 17-year-old price, this PSU is a play on India bid to draw China factories

NEW DELHI: Global multinational companies are looking to shift value chains out of China following the coronavirus-led disruptions, and India, which has so far lagged behind, wants its share of the pie in this big shift.

To give 'Make in India' a lift, a domestic PSU firm has called for expression of interest (EOI) from foreign companies, which wish to use its currently idle factories.

At Rs 23, shares of this heavy engineering company are trading at the lowest level since 2003. This is when the company’s net cash position accounts for 70 per cent of its market-capitalisation (m-cap), and receivable book stands at nearly five times its m-cap at Rs 38,000 crore.


Analysts said if things materialise, this will be favourable for the company, whose half the land bank remained unutilised thus far. Estimating the first such deal to take place only after 12-18 months, they expect the stock to see a re-rating soon.

The stock is BHEL (Bharat Heavy Electricals Limited).

CLSA says BHEL could emerge as an engineering R&D services provider, a contract manufacturer, or a lessor of urban-area industrial land. “This could be a test case of a central public sector enterprise monetising its assets to unlock value against government divestment. Success should determine the extent of stock rerating to its asset value,” the global brokerage said.

A strategic buyer could unleash working capital efficiency, which has blocked a substantial part of BHEL’s balance sheet, it said.

“Assuming 90 per cent value of its gross block and 95 per cent recovery from its receivables, BHEL could be worth about 4.5 times the current price,” it said.

The PSU is looking to offer 16,400 acres of landbank in integrated facilities, centrally located in major cities, industrial clusters and demand centres. MNCs eyeing India face a lot of problems in securing land.

“India has so far lagged in grabbing a share of the global supply chain shift from China. One of the key reasons for this underperformance is lack of ready-made land bank, delay in approvals and fear of dealing with Indian bureaucracy,” said Emkay Global.

BHEL said it is looking for partnerships to manufacture LCD panels for TVs and mobile phones, transportation products such as rolling stock, locomotives and traction motors and heavy electrical equipment.

The move came after the US Secretary of State Mike Pompeo said on April 29 that his government was working with India, Japan, Australia, New Zealand, South Korea and Vietnam to reduce reliance on China.


Even in the most optimistic scenario, the first revenue contribution from such a partnership will materialise only after 12-18 months, Emkay said. “However, we believe the stock offers an attractive risk-reward profile.”

CLSA noted that more than 50 per cent of the land is unutilised and could be worth more than the market capitalisation of the company.

BHEL’s m-cap at present stands at roughly Rs 8,000 crore. Once a laregecap, the company has lost 93 per cent of its value in last 10 years. The firm’s order book stood at Rs 1.09 lakh crore at the end of December quarter.

The government has asked embassies abroad to identify companies scouting for options. Invest India, the government’s investment agency, has received inquiries mainly from Japan, the US, South Korea and China, expressing interest in relocating to the Asia’s third-largest economy, Bloomberg reported.

On Thursday, BHEL’s shares traded at Rs 23, with a trailing 12-month P/E multiple of 10.77 times.

“We continue to see near-term weakness with slow orders and bulging receivables. However, the steep stock price correction coupled with strong balance sheet strength and long- term potential make a case for an earning upgrade,” said Globe Capital. It has a target price of Rs 41 for the stock. .

CLSA has a 12-month target of Rs 40 on the stock while Emkay has a target of Rs 37.