Propelled by demographic expansion, rapid urbanisation, and increasing industrial activity, India’s electricity demand is poised for sustained growth in the near future. Recognising the insufficiency of renewable energy sources alone to meet this escalating demand, the government has outlined plans to establish around 93 GW of additional thermal power capacity by 2032.

Bharat Heavy Electricals Ltd (BHEL), a power equipment manufacturer commanding a market share of around 70 per cent in the provision of thermal power equipment, has benefitted significantly from this developmental push.

While the BSE Capital Goods index has experienced a notable uptick of around 66 per cent over the past one year, the stock of BHEL has surged by an impressive 187 per cent. Presently, the stock is trading at a relatively lofty trailing P/E ratio of 158 times.

Furthermore even when factoring forward estimates given the strong growth momentum, its valuation is quite expensive at one year forward PE and EV/EBITDA of 71 times and 48.7 times respectively. It should be noted that even during the FY2011 when the order book peaked at ₹1,64,145 crore, the stock was trading at much cheaper levels (see chart). Hence, while the order book remains good, given the stock’s pricey valuation, it provides its investors with little margin for safety, which makes a case for booking profits.


Endowed with Maharatna status, BHEL, a capital goods Public Sector Undertaking (PSU), engages in design, engineering, manufacturing, construction, testing, commissioning, and servicing across a diverse array of products and services within the power and industry segments. The power segment commands a significant share, contributing close to 79 per cent, while the industry segment contributes the remaining 21 per cent.

Within the power segment, the company specialises in the provision of power plant equipment, including turbo generators, boilers, turbines, and associated accessories, and undertakes the erection of several types of power plants spanning gas-based, coal-based, hydroelectric, nuclear, and solar power generation. Although the company extends its expertise to equipment catering to other energy sources, thermal power remains its predominant area of focus. In the industry segment, BHEL serves a broad spectrum of sectors, including process industries, railways, power transmission and distribution, and defence.

Order book

As of December 31, 2023, the company has an order backlog totalling ₹1,08,618 crore. The power segment accounts for a substantial 70 per cent share of the total order book, while the industrial and export-oriented orders contribute 26 per cent and 4 per cent, respectively.

During the first nine months of FY2024, the company witnessed a robust surge in order inflows, registering a Y-o-Y increase of 137 per cent to ₹36,048 crore. This growth was fuelled by contracts from prominent PSUs such as NTPC and NHPC, as well as private entities such as Mahan Energen, a wholly-owned subsidiary of Adani Power.

BHEL has diversified its portfolio, securing contracts with the Ministry of Defence for upgraded weapon systems and forming a joint venture with Coal India for a chemical manufacturing facility. Despite this, recent contracts in 2024 totalling over ₹30,000 crore in the power segment underscore its near-term reliance on the cyclical thermal power sector, subject to economic fluctuations.

Performance and outlook

In 9MFY24, the company observed a moderate 5 per cent Y-o-Y growth in revenue from operations, totalling ₹15,037 crore. This growth was primarily driven by the industrial segments, which rose by 8.2 per cent over the same period. However, despite the revenue uptick, EBITDA margin experienced a contraction, declining by more than 600 basis points to -6.2 per cent. This decline can be attributed to escalating raw material costs, which surged by 13.2 per cent Y-o-Y during the period, and the execution of old thermal orders with fixed price contracts. Consequently, the company’s PAT margin also experienced a decline, decreasing from -0.9 per cent to -4.9 per cent over the period.

From a valuation perspective, the stock is currently trading at a one-year forward P/E ratio of 71.2 times, representing a premium of 117 per cent over its five-year historical average of 32.9 times. Despite the company being expected to achieve an earnings growth of around 50 per cent in absolute terms in FY2021-2024E, the corresponding surge in the stock price exceeds 300 per cent.

Examining the period between 2009 and 2012, characterised by a boom in thermal power generation and peak order book levels, BHEL’s EBITDA and PAT margins typically ranged at 16-21 per cent and 11-15 per cent, respectively. Conversely, considering what Bloomberg consensus estimates for FY24E and FY25E earnings project, these margins may not reach those levels. It should be noted that BHEL has been securing the last few significant contracts through competitive bidding processes which may exert pressure on profitability margins, as per the rating agency CRISIL. Besides that, the company has an elongated working capital cycle because of substantial receivables being due from the central PSUs and State utilities.

Given these factors, the forthcoming growth prospects in the thermal and industrial space for BHEL appear to be largely priced into the stock, resulting in an unfavourable risk-reward proposition at current valuation levels.