BHEL Shares Plunge 15% on China Competition Fears; Analysts Cautious
Overview
Bharat Heavy Electricals Ltd (BHEL) shares have shed nearly 15% in three trading sessions due to investor concerns over a potential policy shift that could allow Chinese manufacturers back into India's power equipment market. While the sell-off intensified on January 8, analysts suggest the market reaction may be excessive, citing geopolitical factors and quality issues with Chinese equipment. BHEL's substantial order book provides strong long-term visibility.
Stocks Mentioned
BHEL Faces Investor Sell-off Amidst Policy Speculation
Shares of public sector undertaking Bharat Heavy Electricals Ltd (BHEL) have experienced a sharp decline, dropping nearly 15% over the past three trading sessions. This downturn was triggered by investor apprehension following reports of a potential policy revision that could re-open India's power equipment market to Chinese manufacturers.
Policy Overhang Sparks Fear
The significant sell-off commenced on January 8, with the stock plunging approximately 14% intraday. Media outlets reported that a government committee had recommended allowing Chinese power equipment makers to bid for domestic government contracts. The primary concern for investors is that renewed competition could severely impact BHEL's dominant position in the crucial boiler-turbine-generator (BTG) segment.
Analysts Argue Reaction is Overdone
Despite the market jitters, a number of financial analysts contend that the current market reaction might be an overreaction. Brokerage firms suggest that the recommended policy change is unlikely to gain traction given the current volatile geopolitical climate. Even if restrictions are eased, the actual impact could be minimal due to waning demand for Chinese equipment, attributed to historical quality concerns, high downtime, and significant maintenance costs.
Systematix Shares and Stocks (India) noted in a January 12 report that industry expert interactions indicate any relaxation would likely target supply-chain efficiencies and project execution improvements, rather than substantially increasing Original Equipment Manufacturer (OEM) competition. They added that BHEL's extensive order book, providing over seven years of visibility, shifts investor focus towards execution and margin delivery.
Order Book Strength Bolsters Outlook
BHEL's operational resilience is underscored by its robust order book, currently standing at ₹2.2 trillion as per its Q2FY26 earnings presentation. Last week alone, the company secured a significant ₹5,400 crore contract (excluding GST) for a coal gasification project in Odisha. Order inflows have shown a healthy upward trend, rising to ₹92,000 crore in FY25 from ₹78,000 crore in FY24, a marked improvement from the annual ₹20,000 crore seen during FY21-23.
Financials Poised for Improvement
BHEL is emerging as a key beneficiary of the government's renewed focus on augmenting thermal power capacity. This strategic push aims to mitigate power shortages that have arisen from an over-reliance on solar energy. The strengthening order book is set to reverse BHEL's previously muted financial performance, which was hampered by high operational costs and an average EBITDA margin of just 3.4% between FY23 and FY25. Projections indicate a significant improvement, with EBITDA margins expected to reach 7% in FY26 and surpass 9% by FY27, driven by accelerated project execution.
ICICI Securities anticipates a sharp ramp-up in execution by FY27 as earlier teething issues for new infrastructure are resolved. The firm's Q2FY26 margin stood at a healthy 7.7%. Analysts, according to Bloomberg consensus, forecast BHEL's earnings per share to jump six-fold to ₹9.3 in FY27 from ₹1.5 in FY25. While BHEL is currently trading at a FY27 price-to-earnings multiple of approximately 28x, analysts caution that these elevated expectations and valuation multiples are contingent on timely project execution and sustained margin growth.
