Brokerages see over 50% upside in this PSU stock given its strong balance sheet; do you own it?

After hitting a four-year low in March, when the market rallied in April, many PSU stocks participated.

Around 49 percent of stocks have gained more than 20 percent till date from March lows, while 45 percent stocks have gained 1-20 percent during the same period.

Power plant equipment manufacturer BHEL has gained 16 percent from its March lows, outperforming peers like ABB India (up 1.8 percent), Siemens (up 9.4 percent), etc. The rally was after the stock lost 71 percent in the last year.

Brokerages are bullish on the stock and expect the stock to rally up to 74 percent given the strong balance sheet, favourable risk-reward ratio after steep correction, and approach to attract foreign players for using its plants.

In an interesting development on May 4, BHEL has called for Expression of Interest (EOI) from foreign companies who wish to use its currently idle factories for manufacturing from India.

Emkay feels 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 utilize its idle factories and employees.

"With BHEL offering a readymade solution in the form of factories, staff as well as pre-set vendor base and supply chain, this can open up several possibilities for BHEL in the longer term if handled well, in our view," said the brokerage while maintaining buy/overweight on the stock in sector Emkay Alpha Portfolio, with a target of Rs 37 (upside potential of 57.4 percent)

With power sector demand still struggling, this is a significant diversification move for BHEL, it feels. "India has so far lagged in grabbing a share of the global supply chain shift from China to other emerging markets. One of the key reasons for this underperformance is a lack of a readymade land bank, delay in approvals, and fear of dealing with Indian bureaucracy."

Globe Capital said as the ongoing economic disruption across the world due to COVID-19 has highlighted the dangers of manufacturing activities being concentrated in a single location, the need for diversification of supply chains & manufacturing has thrown up a huge opportunity for India which is one of the fastest-growing economies in the world and an attractive investment destination.

The government launched Make in India campaign in 2014 with the primary goal of making India a global manufacturing hub and also announced a lot of measures in terms of tax rates to attract foreign companies in 2019.

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 materialize only after 12-18 months.

However, it believes that the stock offers an attractive risk-reward profile with its current market cap at Rs 7,200 crore as against FY19 net cash of Rs 5,000 crore. "BHEL’s net cash position (now around 70 percent of market cap) and receivable book of around Rs 38,000 crore (5x market cap) thus provide strong valuation support."

Globe Capital also maintained a positive view on the stock with the target price of Rs 41 (upside potential of 74.5 percent) in medium to long term as the steep stock price correction coupled with strong balance sheet strength and long term potential make for an earning upgrade, though there would be a near-term weakness with slow orders and bulging receivables.

BHEL is India's largest & undisputed leader amongst Indian power plant equipment manufacturers. It is a single source of multiple solutions for energy, industry and infrastructure segments. It is the largest contributor to the country's installed generation capacity with more than 53 percent share.

The company has 16 manufacturing units, 8 service centres. It is the second largest employer in the Indian capital goods industry. The worldwide installed base of power generating equipment supplied by the company has exceeded 185 GW.

BHEL has a healthy order book of around Rs 1,09,000 crore for execution in 2019-20 and beyond. During the year, the company booked the highest-ever N4 orders in its transportation business segment and spares and services electric locomotive to Indian Railways.

In overseas markets, despite challenging circumstances, BHEL has secured 50 orders for projects, products, systems and services from 17 countries in the current fiscal.

Attractive dividend yield of around 8.91 percent; emerging business opportunities in e-mobility segment, EV chargers, electric buses, water treatment plant, sewage treatment plant etc; and government's focus on '24x7 Power for all' are some of key triggers highlighted by Globe Capital.