Bull or bear: Is BHEL about to enter a cyclical upturn?

Shares in Bharat Heavy Electricals Ltd (BHEL) have been on an upturn recently amid hopes it would be a beneficiary of steps taken by the new government to revive India's flagging power sector.

Over the past six months, BHEL stock has risen about 33 percent, compared to an 18 percent gain for the Sensex while the stock has jumped over 80 percent of the past year, compared to a 30 percent rise for the benchmark.

CNBC-TV18's Latha Venkatesh and Sonia Shenoy caught up with two analysts who share different outlooks for the stock going forward. Dhirendra Tiwari of Antique Institutional Equities is bullish on BHEL and has a target price of Rs 315 on the stock, an upside of 27 percent from current levels, while Amol Rao of AnandRathi is neutral on the stock.

Read on to know their respective views.

Below is the transcript of the interview on CNBC-TV18.

Sonia: You have a fairly positive view on BHEL, why do you think the stock has rallied so much and when do you expect to see any kind of fundamental earnings recovery in the company?

Tiwari: You need to understand what Bharat Heavy Electricals (BHEL) is all about. There is the case for strong revival in power equipment market today. So two things, one BHEL is fundamentally strong company with very strong management and products. The problem with the stock performance and de-rating was the market was bad.

Now there are two aspects to the market, the near term revival is obviously visible. The second aspect is that if one looks at the long-term trend in the power market in India, we are of the opinion that there is likely scenario of acute shortage of power three-four years down the line. So what happens that policy makers in power business take a very holistic view. So today if one has to look up and see what is the power environment in 2018-19, one has to plan from today.

So based on my meetings with the top bureaucrats and the policymakers in Delhi, there is serious realisation that there is acute shortage waiting for India in next four-five years. So there is policy action towards that and therefore the market is expected to revise significantly. BHEL being the strong contender in the boiler-turbine-generator (BTG) market will benefit meaningfully from that as well.

Latha: When do you see orders coming in for BHEL?

Tiwari: The important thing is to understand what power is. Today there are three aspects of the power producers, there is an independent power producer (IPP), there is state electricity board and there are central PSUs. When you say there is surplus power or the power producers are in bad shape, you are talking about IPPs. So that is one segment of the market and state generation companies, they were not in the market. So why should I assume that if IPP is struggling, then the whole power sector is in a mess.

What I believe is there is a particular cycle, there was a cycle of IPPs for last four-five years and there is going to be a cycle for the central PSUs and state PSUs for next four-five years.

You will be surprised to know that in last seven months about 10000 megawatt power projects have already been awarded. I know for sure that there is a pipeline of 15000-16000 megawatt from mainly state and central PSUs to be awarded in next six-seven months. So the basic argument that where are the power projects, is already busted because we already have seen awarding of really 10000-11000 megawatt power projects in last seven-eight months. So that point is already taken care of.

The issue today with BHEL is that can we see the sustained growth and I believe that there is a likelihood of sustained growth in this particular market now.

Sonia: Last quarter the management already expressed that hope of recovery. If you look at what they mentioned in their conference call, they stated that as against 6.2 gigawatts of orders finalised in FY14, they expect 16 to 18 gigawatts by the end of FY15. So they had expressed that improvement in orders. How much of that do you think is already priced into the stock in this run-up or do you see more to go on the upside?

Tiwari: It is not priced in at all. If you look at what can result into. When you look at 16000-18000 megawatt of power projects, there is one state Telangana, this state has no power plants. There is new CM, new project and basically they are looking at significantly making state power.

Now if you go through the news of recent times you will understand that BHEL has signed an MOU with Telangana state government to set up 6000 MW power projects. Now that is not included in the 16-18000 mw that we are talking about.

Since this is an MOU this kind of order can straightaway come to BHEL over next five-six months. Understand the value of that, it is Rs 30,000 crore order value for BHEL. So what can happen to the stock. So today when we see at BHEL there is concern of ordering which is probably being taken care of, there is concern of margin which I think is going to be a bigger surprise. I firmly believe that BHEL can go to 15-16 percent margin and therefore it can result into meaningful earnings recovery. So if I look at this year definitely no earnings growth, probably there will be a degrowth but next year definitely is going to be at least 10-12 percent kind of earnings growth. But FY17 could be a year where one can look at 50-60 percent kind of earnings growth.

Now if you look at BHEL stock price it is a long gestation business so typically if you have studies BHEL for last 10-12 years you will realise that the market value discounts at least three years ahead of earnings. So if I see earnings recovery in FY17-18, I would definitely look the stock will start reacting today itself. So that is the reason I am saying that it is not discounted fully. So it is just Rs 50,000 crore market cap stock.