BHEL’s stock has declined 25% since it reported an Ebitda loss in Q1FY16 (vs a 17%/8% decline for BSE Capital Goods Index/Sensex).
We believe there is more downside left, as our discussions with consultants suggest that: (a) ~31% of BHEL’s order book is slow moving and an additional 13% is stalled; (b) enquiries from the private sector for setting up new power plants continue to be negligible, as the standing linkage committee on coal linkages has been virtually dissolved and there is no policy in place for auctioning coal linkages for the power sector; (c) enquiries from NTPC may decelerate, given its shift in focus towards expanding capacity through acquisition (primarily state-owned gencos); (d) rising interest in renewables (especially solar), and (e) likely slow progress in the recently won 5.9GW order win in Telangana, as this project may face offtake challenges due to peak deficit of only 1.2GW in the state.
At CMP, the stock is trading at 20.4x FY17E P/E, a 63% premium to the historical average despite the structural decline in ordering.
At our recent meeting with a few consultants, we learnt that ~31% of BHEL’s order book (i.e. 13.9GW) is moving at an extremely slow pace and an additional 13% (i.e. 5.7GW) has actually been stalled.
Consequently, the quantum of slowmoving/ stalled orders in BHEL’s order book at ~19.6GW is double that of the management’s guidance of 10GW. Our analysis of orders under-construction for BHEL suggests that~31% of orders are slow moving; projects defined as slow moving include projects which have seen delays of 2-6 years.