At the heart of the bullish thesis is India’s roadmap for aggressive coal capacity. The country is targeting 340 GW of coal-fired capacity by 2047. Even after taking into account the projects under construction and the decommissioning of aging plants, JM Financial estimates that India will need 170 to 180 GW of new thermal projects to maintain its installed base.After almost five to six years of limited orders, a new cycle of thermal capital investments began in September 2022. Of the 97 GW to be added in FY34, 45 GW has already been ordered and another 32 GW is under tender.
BHEL currently has an order book of Rs 2.23 lakh crore, including 35 GW of projects under construction. This ensures strong visibility of revenues in the coming years.
Execution mix to drive margin flexion
The key differentiator in this cycle, according to JM Financial, is the recovery of margins. BHEL’s older, pre-Talcher projects were largely low margin. As these near completion and execution shifts to newer, higher margin post-Talcher orders, operating leverage is expected to increase. The broker expects EBITDA margins to rise sharply from 4.4% in FY25 to 10.7% in FY28.
It also estimates that revenue, EBITDA and PAT will grow at 20%, 62% and 98% CAGR during 2025-28, respectively. Earnings per share are expected to rise from Rs 1.5 in FY25 to Rs 11.8 in FY28, a nearly eightfold increase in three years.
Importantly, BHEL has signed an MoU with the Ministry of Heavy Industries, targeting Rs 337 billion in production value and an EBITDA margin of 9.91% for FY26. Achieving these goals would further strengthen confidence in the turnaround story.
Beyond thermals: Optionality in the gasification of nuclear energy and coal
While thermal energy remains the main source of profit, BHEL’s freedom of choice in the emerging segments strengthens its long-term investment opportunities. India aims to increase its nuclear capacity from 8.8 GW to 100 GW by 2047. BHEL is the only domestic manufacturer of nuclear turbine generator sets and has supplied equipment for more than half of India’s installed nuclear capacity. Any acceleration in nuclear power orders could significantly increase the non-thermal revenue mix.
The company has also won orders for coal gasification, including an order for a syngas purifier worth Rs 2,800 crore, besides a Rs 5,400 crore EPC contract for the same project.
These emerging industries, together with transmission (765 kV and HVDC), transportation and defense, diversify profits.
The Chinese import risk is exaggerated
There are concerns about a possible easing of restrictions on Chinese suppliers. However, JM Financial believes that removing restrictions at the component level can actually benefit PSUs like BHEL by reducing input costs, while imports of complete equipment are unlikely to materially disrupt domestic players.
Risks to watch
The main structural risk remains a faster-than-expected shift to renewables plus storage as baseload energy, which could change assumptions about coal capacity. In addition, any delay in the implementation of the policy or procurement may affect the inflow of orders.
There is also an execution risk as the long hiatus in thermal order has weakened parts of the domestic supply chain ecosystem. However, channel checks indicate a revival is underway.
Rating comfort at OFS price
At the OFS floor price of Rs 254, the stock is available at around 21x FY28 earnings. JM Financial values the stock at 30x FY28 earnings to arrive at its target price of Rs 355
Given the expected sharp improvement in margins, multi-year earnings visibility on the back of an order book of Rs 2.23 lakh crore, and freedom of choice in nuclear and coal gasification, the OFS appears attractively priced for investors with a medium-term horizon, the broker said.
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