We value BHEL at 0.8x FY16f P/BV (unchanged; roll-over from September 2015f) to arrive at our revised target price. With a deterioration in revenue and margin visibility, a P/BV methodology adequately captures interim volatility, in our view. We benchmark our assigned multiple to the traded average during 2000-03, which was the last similar down cycle period in which the company recorded ROE of 13-15%. We maintain our estimates which still build in an optimistic coal supply outlook, in our view, and do not build in receivable risks. We see a ~33% downside.
For a company that will generate <18-20% ROE sustainably and no-growth for almost a decade, one can assign a 2-2.5x P/BV value at best, as per our estimates. But then again this would be 5-7 years out, which means discounted to current value it would be close to 1x P/BV. In comparison, the stock is currently trading at 1.4x FY14f P/BV and 1.3x FY15f P/BV. Even as demand for power is unlikely to slow, we expect actual capacity to be constrained by land & fuel availability and environmental clearances. Meanwhile, new concerns on execution emerge as order book credibility for the sector is in question now.