Stock pick of the week: How to gain from BHEL's long-term positive outlook

Bharat Heavy Electricals Limited (BHEL), the second largest company from the heavy electric equipments sector, is a clear victim of the ongoing trouble in the power sector and the resultant postponement of new power generation projects. No wonder it has reported revenue fall during the last five years, and the first quarter of 2018-19 was no exception.

Its net sales for the quarter fell by 24% y-o-y and 56% q-o-q. Since some of the factors for this fall (ie tight liquidity, land availability issues, local agitations against big projects, etc) are medium term in nature, these may weigh on future execution and sales also.

Incremental order inflow to BHEL is also low owing to weak capacity additions happening in the power sector. Though around 16GW of orders is in the pipeline, the final award is getting delayed-This delay in order inflow has also pulled down the order book/sales ratio to 3.6 times as on 30 June, compared to 4.1 times a year ago.


Though the situation will remain bleak in the medium term, the longterm outlook for the heavy electric equipments sector looks bright because the domestic power demand is increasing faster than the capacity additions, which eventually will take the country to a power deficit situation in the next five to seven years.

Analysts’ views
Sell 16
Hold 9
Buy 9

The Centre ’s pet projects like 100% rural electrification, introduction of electric vehicles, etc are the factors boosting domestic electricity consumption. Since this increased demand cannot be met by renewable (hydro, solar or wind) energy sources, coal-based power generation capacity has to increase in coming years. Any kickstart in thermal plant additions will only help companies like BHEL to bag big orders.

Despite its bleak medium-term outlook, analysts are getting bullish on this counter mostly because of its very valuation, triggered by its continuous price fall. For example, BHEL has underperformed the Sensex and ET Capital Goods Index by 33% each during the last one year (See Chart ). While its price to book value is placed at just 0.54 times, the dividend yield is placed at 4.22%. Other valuation parameters are also at comfortable levels (eg – EV/Sales is only at just 0.5 times). Though BHEL is a good long-term bet, investors need to stagger their purchase in this counter, because the technical factors are also negative now and therefore, the ongoing downward spiral may continue for some more time.

Bharat Heavy Electricals compared with ET Capital Goods. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.

Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” in the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.