Brokerage Upgrades Target On BHEL, But Still Sees 70% Downside

Analysts at Kotak Securities raised their price target on BHEL but maintained its “sell” rating for the public sector firm.

What Happened: The analysts anticipate a healthy increase in BHEL’s business scale following the power ministry’s decision to boost capacity addition to 80 gigawatts by FY2032 and to expedite the ordering process.

This change could result in BHEL handling 10-15 gigawatts per annum from FY25-27, against its capacity of 20 gigawatts. The brokerage firm expects the state-owned company’s revenue to grow at 20% compound annual growth rate over FY2024-32.

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Despite strong revenue growth and associated operating leverage, a few factors are expected to dilute the impact: low bidding margins in initial order wins and legacy backlog as well as sharing pricing gains. The brokerage firm also highlighted the increase in working capital requirements during high revenue growth phases.

Kotak Securities expects the EBIT margin, excluding other income, to surpass 10% and 11% levels by FY27 and 30, respectively,  improving from its current ≥÷ levels.

However, working capital requirements during the growth phase will restrict free cash flow (FCF) generation in the medium term. Additionally, moderating demand growth and margins will further limit FCF generation over time.

The brokerage firm raised its target price to ₹98 from ₹75 but maintained its sell rating. The target indicates around 70% downside from the stock’s last closing price of ₹320.

Price Action: BHEL’s share price was down 2.23% to trade at ₹312.85 shortly after market open on Thursday.

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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.