On Tuesday, CLSA retained its underperform rating on Bharat Heavy Electricals Ltd (BHEL:IN) stock, with a steady price target of INR189.00. The firm highlighted that the previous catalyst for BHEL's inclusion in global passive indices has passed, and the entry of Larsen & Toubro (L&T) into the thermal power equipment sector casts doubt on BHEL's market dominance. Despite an impressive 77% year-over-year increase in order inflow and a 40% growth in backlog, CLSA pointed out that the current stock valuation is steep at 40 times the FY26CL earnings.
The financial institution noted BHEL's operational improvements, mentioning a significant 347 basis point gross margin increase in the second quarter of FY25, which is attributed to a 40% growth in backlog during the same period. This uptick in execution, which saw a 33% rise, marks a turnaround from a seven-year decline, resulting in EBITDA profits as opposed to previous losses. The analyst emphasized that while there has been a notable recovery in fossil orders due to India's focus on energy security, the outlook for BHEL's thermal business appears dim beyond FY30.
Despite these operational gains, BHEL's stock has begun to underperform the Nifty by a notable 11%-24% over the past one to six months. The firm's assessment remains cautious, with the stock's valuation considered expensive at 40 times the projected earnings for FY26CL. The analyst concluded with a view that while BHEL has shown some operational progress, market challenges and valuation concerns persist.
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