BHEL to end its 8-year Q1 loss streak? China impact, share price target

JM Financial in a fresh note on Bharat Heavy Electricals Ltd (BHEL) expects the PSU to report profitability in the June quarter after losses in first quarters in the previous eight years since FY19. The domestic brokerage sees a 20 per cent revenue growth for BHEL in Q1 with Ebitda margin of a minimum 1.9 per cent, up 1,172 bps YoY.

The domestic brokerage said the impact of the government's decision to allow four Chinese electrical equipment companies to participate in PSU tenders for HV transformers and GIS equipment will have limited impact on BHEL.

JM Financial said the Defence Acquisition Council (DAC) has approved a Land Based Testing Facility (LBTF) for electric propulsion systems for Indian naval assets, where BHEL could emerge as a key beneficiary given its rich and relevant experience.

Another positive for the stock is CRISIL's upgrade of the long-term credit rating of BHEL to AA/Stable from AA-/Stable, citing its strong order book, improving profitability, and stronger balance sheet.

China impact: Competitive intensity to rise?
JM said there are concerns that entry of Chinese players may raise competitive intensity in upcoming bids for transmission equipment. It said an analysis of orders during recent years showed that BHEL bagged most of the transmission equipment orders as part of substation packages and other transmission projects.

Standalone equipment orders that are subject to intense competition contribute less than 1 per cent to BHEL’s revenue. Hence, JM Financial does not expect any meaningful impact on BHEL.

"Additionally, as per our channel checks, a similar policy move in BTG
(boiler, turbine, generator) segment is highly unlikely," it said.

BHEL Q1 results preview
For Q1FY27E, JM estimated BHEL’s revenue at Rs 6,600 crore, up 20 per cent YoY led by pick-up in execution, improving gross margin and increasing share of new orders in execution mix.

"We expect the company to report profitability in 1Q after losses in first quarters in the previous eight years (last reported profit was in Q1FY19," it said.