Biggest BHEL bear still projects 73% downside on the stock after Q3 results

Brokerage firm Investec, one of the biggest bears on state-run Bharat Heavy Electricals Ltd. (BHEL) continues to see a 74% downside potential for the stock after its third quarter results, that were reported during market hours on Monday.

In its note on Tuesday, January 20, Investec maintained its "sell" rating on the stock with a price target of ₹70, which is significantly below Monday's closing price of ₹263.

Investec said that its bearish stance stems from the fact that meeting execution timelines could be challenging for BHEL, given an impaired supply chain. "Our checks indicate that weak ordering during financial year 2016-2023 forced several thermal power component vendors to exit or shut shop. Even BHEL has closed in-house manufacturing of several components in the last 10 years," Investec wrote in its note.

The other major bear on BHEL is Kotak Institutional Equities, who's "sell" rating comes with a price target of ₹120 apiece, implying a potential downside of 55% from current levels.

Kotak has cut BHEL's Earnings Per Share (EPS) estimates for financial year 2028 by 15% to factor in a lower pace of execution, modest cuts to gross margin estimates and a marginal increase in employee costs linked to the pay commission.

"Average inventory levels remained at high QoQ levels relative to revenues. This poses risks to the sustainability of the higher other income booked in Q3," Kotak's note stated.

BHEL's EBITDA margin has been very weak over the past decade, with an average EBITDA margin of 2.1% over financial year 2014-2025 and the minimum being -18% in financial year 2021, JPMorgan's note stated.

"While BHEL has won majority of orders in coal-based plants post Covid-19, the long track-record of unprofitable execution warrants caution on the pace of the execution," JPMorgan stated, adding that in most contracts, payment terms are onerous, which leads to very back-end cash profits in the business, and large working capital needs in the form of inventory, contract assets and receivables.

On the flip side, Nuvama is a bull for BHEL, maintaining its "buy" rating and a price target of ₹353, indicating a potential upside of 34% from current levels.

Nuvama said that after "kitching sinking" in financial year 2026, BHEL could see a "turnaround year" in financial year 2027, free of legacy drags and a start of operating leverage benefits.

19 analysts have coverage on BHEL, of which eight have a "buy" rating, two say "hold", and the other nine have a "sell" rating on the stock.

BHEL reported its December quarter results on Monday, which may have been higher on a year-on-year basis, but significantly missed consensus expectations from analysts. The stock had declined as much as 3% from the earnings announcement, but recovered to end 1% lower at ₹263. The stock has gained 21% in the last one year.