Bharat Electronics Ltd has steady performance; maintain “Tactical BUY” for Target price: INR 130, Upside 23%: Edelweiss

Steady performance; maintain “Tactical BUY”

Bharat Electronics (BEL) reported strong 2QFY23 results broadly inline estimates. Revenue came in at INR 3946 cr, +7.8% YoY/+26.8% QoQ with EBITDA margin of 21.7% (vs 23.4% YoY and 16.5% QoQ). 2QFY23 margin is slightly lower than to margins profile in 2Q’s of pre-pandemic (for e.g. 24% in 2QFY18, 25.3% in 2QFY19 and 19.9% in 2QFY20. PAT came at INR 611 cr, -0.3% YoY/+41.6% QoQ, driven by better revenues and operating leverage. Order book at the end of 1QFY23 is INR 52,795 Cr, implying that new order intake in the quarter was quite weak at INR 1,370 Cr (slightly better than 1QFY23 order intake). We believe BEL will regain and sustain double digit revenue growth in FY23-24. We expect the company to deliver 21%/24% revenues/PAT CAGR over FY22–24E. Using 26x PE multiple (largely inline current trailing multiples), we raise target price to INR 130 (at 26x FY24 earnings).

Strong order book to drive revenue growth; Addition of INR 8,060 cr order from Triton Electric

BEL has a strong order book position of INR 52,795 Cr. In Oct-2022, BEL signed INR 8,060 cr contract with Triton Electric vehicle for supply of battery packs for electric trucks. This contract is not reflected in the order book, and adjusting for it the order book would be INR 60,855 cr. Triton contract is executable over CY23 & CY24.

Moderation in book to bill ratio along expected lines

Book-to-bill ratio stands at 3.13x (LTM basis) compared to 3.8x after 4QFY22 and 3.3x after 1QFY23, Moderation in book to bill ratio is along expected lines as de-bottlenecking (from normalcy in execution and easing of supply chain) will lead to normalized/quicker order-to-revenue conversion and seasonality in order intake (whereby 1H is usually softer).

Valuation

We believe BEL will regain and sustain double digit revenue growth in FY23-24, based on strong order book position, strong project line-ups, and easing of supply chains. Order book stands at INR 52,795 Cr and after adjusting for Triton Electric vehicle contract of INR 8,060 Cr, order book would be INR 60,855 cr. With strong order book in hand and parallel execution capability for multiple platforms, BEL has a strong P/L growth visibility. Further, it is emerging as a key beneficiary of increase in defence capital expenditure. Rising local player allocation & GoI’s focus on exports in defence are material growth tailwinds for the company. We expect BEL’s top-line growth to improve for FY23/24 given better new order growth in past two years & normalisation in supply chain. We raise our FY24E earnings by ~12% and using 26x PE multiple (largely inline current trailing multiples), we raise target price to INR 130 (at 26x FY24 earnings)