Bharat Dynamics Ltd Research Report By Nirmal Bang

The PSU Outlier – Heads You Win; Tails You Don’t Lose Much

With an eye on outcome of the upcoming LS elections on 23rd May 2019, we believe PSU stocks in industries like defense and railways would stand to be big winners if the incumbent government returns to power. In a scenario where the incumbent government loses, these businesses would underperform, however current trough valuations would restrict any major decline in the stocks of these companies.

Upon analyzing the deeply undervalued PSU stocks from defense & railway industries, we identify Bharat Dynamics as a clear outlier. With the company beating all other PSUs on most parameters, we believe the stock presents a good entry opportunity with a favorable risk-reward ratio considering the company’s cheap valuations at 7.8x FY19E P/E and 4.7x FY19E EV/EBITDA on one hand and superior proven track record of growth, ROE, free cash flow generation on the other.

We value the company at 10.3x FY19E EPS in line with the PSU defense and railway basket & arrive at a TP of Rs. 343 for the stock.

Key Business Strengths

Presence in most missile and torpedo systems; Sole manufacturer from India for SAMs and ATGMs: BDL is the sole manufacturer in India for SAMs (Surface to Air Missiles) and ATGMs (Anti-Tank Guided Missiles). It has presence in most of the missiles and torpedo systems.

It is also engaged in the business of refurbishment and life extension of missiles manufactured. Further, BDL is the co-development partner with the DRDO for next generation of ATGMs and SAMs. BDL has also entered into technology transfer agreements with established global players such as Thales.

Domestic defense industry presents a huge opportunity for BDL:

The Stockholm International Peace Research Institute (SIPRI) Arms Transfer Database indicates that India has remained the largest importer of defense equipment in the 2012-16 timeframe with its share in global arms imports increasing from 9.7 % in 2007–11 to 12.8 % in 2012-16. Recognizing this, the government is now adopting a multi-pronged approach towards indigenization consisting of a slew of measures including the new DPP 2016.

The Indian Guided Missile and Torpedo market landscape consists of two main types of suppliers at present – DPSUs with indigenous R&D & manufacturing capabilities and foreign players which export their missile systems to India. Frost & Sullivan forecasts a cumulative market size of USD 24.49 Bn in the 2017-26 time frame for guided missiles and torpedoes. The market size of SAM (Surface to Air Missiles) for the same period stands at a huge USD 9.79 Bn while that for ATGMs (Anti-Tank Guided Missiles) stands at USD 1.71 Bn.

Strong order book and established financial track record of delivering growth:

As on Q3FY19, BDL had a strong order book of Rs. 14,836 Cr ensuring sales visibility (Order book-to-Sales of 3.7x). BDL has delivered consistent growth over the last five financial years both in terms of financial and operational metrics.

Its revenue from operations and EBITDA has increased from Rs. 2841 Cr and Rs. 275 Cr respectively, in FY15 to Rs. 4577 Cr and Rs. 887 Cr, respectively in the TTM period; being mainly driven by orders of Akash missiles. BDL’s clientele includes Ministry of Defense, other defense PSUs and Government bodies under the MoD, India and other countries.