High-speed train orders: Too little, too far for BHEL

New order opportunity pegged at ~1,500 crore, which is less than 5% of company's expected FY18 revenue

As the euphoria over highspeed train orders settled, the BHEL stock, too, on Friday gave up all the gains it clocked a day earlier. And, there are reasons for this. If analysts are to be believed, there is not much change expected in BHEL’s prospects in the nearterm; second, the high-speed train orders may not be enough to move the needle.

The stock had gained 3.8 per cent to ~137.40 on Thursday, compared to Wednesday’s closing price of ~132.55. On Friday, it fell 3.9 per cent to close at ~132. The Street’s optimism had increased on Thursday, as rolling stock for the MumbaiAhmedabad bullet train project will be sourced from a joint venture between BHEL and Kawasaki of Japan.

This opportunity, however, may not be big enough to substantially improve BHEL's near-term prospects. For one, the project is estimated to be completed by 2023. Analysts at Nomura believe the 2023 timeline will be extremely difficult to meet. Further, in a note, Kotak Securities’ analysts peg the business opportunity for BHEL at ~1,500 crore. This is less than five per cent of BHEL’s estimated FY18 revenue of ~31,500 crore.

The visibility in the power business also remains subdued, which is keeping the Street’s sentiment low. BHEL’s order inflow remains under pressure, posing risks to its medium-term revenue visibility. During the June quarter, for instance, order inflow declined 44 per cent year-onyear to ~1,800 crore. Consequently, the order book (pending orders) was down six per cent year-on-year to ~1,01,380 crore. Analysts at Jefferies, after the results, had said the decline in the order book raised concerns on medium-term revenue visibility unless there was a sharp expansion in the market pie. While the management had maintained to analysts that the industry pipeline was between 10-12 Gw, and BHEL is the L-1 (lowest bidder) for orders worth ~25,000 crore (including NTPC’s 2,400-Mw Patratu power plant, 660-Mw Panki plant and 660-Mw Bhusawal plant), Jefferies said these were needed to meet their annual expectations of ~36,200 crore of order inflows.

However, there is scope for sentiments to improve. Analysts at Motilal Oswal Securities say new orders worth ~25,000 crore are expected to be finalised in the near term. The other positive is that executable orders (from BHEL’s existing order book) have also increased from ~6,250 crore to ~7,600 crore. Also, for flue gas desulphurisation (FGD) systems for power plants, NTPC has floated tenders for 11 projects (17,000 Mw) worth ~18,000 crore, say analysts who expect orders for another seven projects (7 Gw), worth ~7,000 crore, to be floated soon. If BHEL can bag a sizeable chunk of these orders, it can boost the company's financials and market sentiments.