Kotak Institutional Equities has cautioned that Bharat Heavy Electricals (BHEL) may be overvalued, as its current share price assumes thermal power capacity additions that exceed industry projections. While BHEL shares have surged 63% in the last six months, the brokerage warns that long-term demand for coal-based power faces structural risks from the growth of renewable energy.
Bharat Heavy Electricals (BHEL) has seen a sharp rally in its stock price over the past six months, rising 63% and significantly outperforming peers like NTPC, which saw a 13% decline during the same period. However, analysts at Kotak Institutional Equities (KIE) suggest that this stock market momentum may be ignoring the changing realities of India’s power sector. The brokerage argues that BHEL’s current market capitalization of approximately ₹1.48 trillion implies an aggressive expectation of future growth that may not match official industry forecasts.
The Valuation Gap
Kotak’s analysis uses a reverse valuation method, which works backward from a company's market price to determine what level of growth investors are expecting. According to the report, BHEL’s current valuation assumes the company will deliver between 150 GW and 300 GW of boiler, turbine, and generator equipment over the long term. This contrasts sharply with projections from the Central Electricity Authority, which expects total thermal capacity additions in India to reach only about 86 GW to 100 GW between fiscal years 2027 and 2036. The brokerage suggests that this discrepancy indicates the market may be pricing in more thermal equipment demand than is actually likely to materialize.
Structural Shifts in Power
The fundamental concern for investors is the shifting landscape of the energy sector. As solar energy and battery storage become more cost-competitive, the long-term reliance on coal-based power plants is facing structural pressure. BHEL remains heavily dependent on the thermal power segment, which accounts for about 75% of its ₹2.6 lakh crore order book. Analysts note that while there is an immediate demand for thermal projects, the future total profit pool for equipment manufacturers could be limited to between ₹500 billion and ₹1 trillion. Relying heavily on a sector that faces long-term transition risks could pose a challenge to sustained profitability.
Diversification Efforts
While thermal power remains a central pillar of its business, BHEL has been actively working to diversify its revenue streams to reduce this dependence. The company is investing efforts into segments such as nuclear energy, coal gasification, defense, and transportation. These initiatives are important for investors to monitor, as the success of these new areas will determine whether the company can mitigate the potential slowdown in traditional coal-based power orders. Additionally, the company is still working to overcome the lingering effects of the weak order cycle that occurred between fiscal years 2016 and 2023, which disrupted supply chains and may affect current project execution timelines.
Moving forward, the key monitorables for investors will be the actual pace of thermal capacity additions compared to government targets, the speed at which BHEL can scale its non-thermal businesses, and the company's ability to maintain profit margins amid this structural transition.