Bharat Electronics Limited Research Report By Sharekhan

Summary

Š We retain our Buy rating on Bharat Electronics Limited (BEL) with an unchanged price target of Rs. 135, considering reasonable valuations and strong execution capabilities.

Š Management expects double digit revenue growth with margins to be around 20% for FY2021E. Reiterate FY2021 order inflow target of Rs. 15,000 crore.

Š Order book remains healthy at Rs. 52,148 crore (4x its TTM revenue), which provides good revenue visibility.

Š BEL is well positioned to benefit from rising defence expenditure supported by strong manufacturing base, execution track record, and continued focus on in-house R&D capabilities.

Bharat Electronics Limited (BEL) in its analyst conference call highlighted on opportunities arising in terms of order inflow in the upcoming years, guidance on revenue and margins as well opportunities in the diversified sectors it is present. Management believes BEL is well placed to tap on upcoming opportunities on Aatmanirbhar Bharat programme and the recent ban on import of 101 defence items (various stages of discussion for manufacturing ~55 items). Further, more than 1,000 equipment list is ready and is to be made in India.

On the order pipeline front, management is looking for decent orders from the defence segment such as Quick Reaction Surface-to-Air Missile (QRSAM, opp. size ~Rs. 30,000 crore over the next 5-7 years), Long Range Surface missiles (LRSAM ~Rs. 50,000 crore order over the next few years), Electronics Warfare Systems, Akash Weapon System (Army) etc.

Based on healthy pipeline, management is confident of achieving an order inflow of Rs. 15,000 crore (~Rs. 5,000 crore already bagged in H1) for FY2021. On the export front, BEL has expanded its global footprint with current order book of $200million. Management expects the order book to increase to $500million over three years. Despite the pandemic, management continues to invest heavily in capex and has maintained its guidance of capex of Rs. 550 crore (Rs. 150 crore already invested in H1FY2021) for FY2021. The company is setting up new facilities in AP (~1,000-acre land) and Telangana (~100acre).

Construction at both the facilities is progressing well and is expected to commence by F Y2023. During the first half of F Y2021, execution was driven by ventilators orders (include 1 3,000 v entilators m anufactured a nd d elivered), a lthough t he c ompany d oes n ot e xpect large o rders a s r equirements o f t he s ame h ave c ome d own. M oreover, d uring H 1, t here h as b een rise in inventory levels for defence projects and management expects to liquidate inventory in H2FY2021. Due to challenges faced by Ministry of Defence and various government authorities, there has been a rise in trade receivables.

Management expects the payment cycle to improve and trade receivables to reduce by 70%-80% by F Y2021 end. Apart from defence, Smart City and Homeland a re o ther f ocus a reas f or t he c ompany. S mart C ity a nd H omeland c ontributed 1 0% i n order book and 7% in revenue and are expected to reach 15% in the next three years for the civilian segment. Other areas such as critical medical equipment manufacturing, ventilators, and services are also being evaluated. Overall, management remained confident of its growth opportunities and expects around double-digit revenue growth with margins at around 20% in FY2021E and reiterated order inflow target of Rs. 15,000 crore.

We believe BEL is well positioned to benefit from the rising defence e xpenditure, s upported b y a s trong m anufacturing b ase, e xecution t rack r ecord, a nd continued focus on in-house R&D capabilities. The stock is trading at reasonable valuations of 12.2x and 1 0.8x i ts F Y2022E a nd F Y2023E earnings, respectively. With improving g rowth v isibility, w e retain our Buy rating on the stock with an unchanged price target (PT) of Rs. 135.

Our Call

Valuation: Maintain Buy with an unchanged PT of Rs. 135:

BEL is well positioned to deliver strong performance in the coming years given its robust order book, major beneficiary from increasing emphasis on indigenisation, and limited competition. BEL remains our preferred pick in the defence sector on account of its strong manufacturing and R&D base, good cost control, growing indigenisation, and strong balance sheet with improving return ratios. We expect earnings to report CAGR of 11% during FY2021-FY2023E. The stock is trading at reasonable valuations of 12.2x and 10.8x its FY2022E and FY2023E earnings, respectively. With improving growth visibility, we retain our Buy rating on the stock with an unchanged PT of Rs. 135.