Analysts give thumbs up to BHEL’s novel asset monetising initiative

Analysts turned bullish on BHEL after the PSU major made an ‘out-of-the-box’ thinking.

Just when global majors are looking to diversify their supply chains, BHEL has floated expressions of interest to woo international companies to set up manufacturing in India.

The stock has been under heavy pressure, due to power sectors and general negative sentiment towards PSU stocks. The Navratna PSU stock had hit a 52-week low of ₹19.20 on March 25. On Tuesday, it closed at ₹22.85, down 2.77 per cent. The stocks 52-week high is ₹75.5’.

Under its new chairman, BHEL seeks partnerships for: a) maintaining 16,400 acres of land bank in integrated facilities, centrally located in major cities, industrial clusters and demand centres. BHEL is considering proposals to utilise land for manufacturing facilities, hospitals, smart cities, etc; b) looking to expand in the solar value chain by adding poly silicon refining and wafer and ingot manufacturing; c) creating an up to 5-MWhr capacity lithium-ion cell manufacturing facility for use in electric vehicles and energy storage; d) manufacturing LCD panels for TVs and mobile phones; e) manufacturing transportation products such as rolling stock, locomotives and traction motors; f) manufacturing heavy electrical equipment; g) and manufacturing process plant equipment such as compressors, turbines, motors, columns and vessels.

Global investment manager, CLSA, said: This could be a test case of a central public sector enterprise monetising its assets to unlock value versus government divestment. Success should determine the extent of stock re-rating to its asset value (4.5x CMP).

CLSA has reiterates its ‘buy’ rating on BHEL with a price target of ₹40.

Risks

However, a delay in government divestment and revival of the India thermal power market is a risk. A slow turnaround in power orders and a delay in pick up in industrial capex are also downside risks. Other risks include aggressive bidding due to increased competition, volatile material prices, and employee resistance to government divestment, CLSA has cautioned.

Amar Kedia, Emkay Global Financial Services, in a report said, this could be a win-win situation for both the foreign company and BHEL. “The partnership can shorten the time to set up manufacturing facility for the incoming partner while also helping BHEL utilise its idle factories and employees. With power sector demand still struggling, this is a significant diversification move, in our view,” he added.

However, Emkay believes it is too early to comment on how much value this could add for BHEL as, even in the most optimistic scenario, the first revenue contribution from such partnership will materialise only after 12-18 months.

“We believe that the stock offers an attractive risk-reward profile with its current market cap at ₹7,200 crore as against FY19 net cash of ₹5,000 crore. BHEL’s net cash position (now about 70 per cent of market cap) and receivable book of nearly ₹38,000 crore (5x market cap) thus provide strong valuation support, Amar Kedia said.

Emkay maintains its ‘buy’ rating on the stock with a price target of ₹37.

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