Broker's call: BHEL (Buy)

CMP: ₹54.45

Target: ₹62

Key takeaways: a) We believe that the power sector is now poised for structural reforms, while end-consumer demand trends still remain healthy. Specifically for BHEL, an eventual upturn in the power capex cycle is a definite positive, in our view.

b) The new power ministry over the past few months has been working toward enforcing stricter contract and payments norms by discoms. Enforcing the Line of Credit-backed power supply and recent talks on linking central government assistance/PFC funding to privatisation of distribution franchise in States are some of the measures that infuse confidence about a potential kick-start of the power capex cycle.

c) The current situation is comparable with FY04 when power deficit bottomed out before rising sharply over the subsequent years due to an economic boom, and in turn, driving power capex up.

d) Even otherwise, the company’s net cash position of about ₹5,500 crore as of March 2019 and receivable book of ₹38,000 crore provide valuation support given that its total market capitalisation itself is ₹190,000 crore (less than 0.5x receivables).

Valuation: Given the uncertainty looming over the actual capex revival, we value BHEL only for its net current assets (with receivables discounted by 30 per cent).

Risks: A continued slowdown in new orders/execution and write-offs on receivables.