Bharat Electronics Research Report By Motilal Oswal

Operational performance in line; Working capital cycle improvement impressive

– 4QFY16 operational performance broadly in line with estimates: BHE reported revenue of INR32.1b (up 9.8% YoY) v/s estimate of INR34.3b and operating profit of INR9.9b (up 26% YoY) v/s estimated profit of INR9.1b. Gross margin expansion of 481bp YoY improved margins 167bp YoY to 31%.

– 4QFY16 revenue at INR32.1b (up 5.8% YoY) was below our estimate of INR34.1b. Execution deferments on account of delay from vendors in supply of input equipment like Tatra truck from BEML in 3QFY16 has led to miss in the topline for the company. For FY16, BHE’s revenue was supported by contribution from segments like Akash missile system, 3D tactical control system, Fire control systems, Low level light weight radar, integrated Sonar suit, L Band surveillance radar for export and passive night vision devices.

– Gross margin expansion drives operating profit growth of 26%: Despite revenue growth of mere 9.8% YoY, 4QFY16 operating profit increased 26% YoY to INR9.9b—led by strong gross margin expansion of 481bp YoY to 53.4%. Gross margin expansion was primarily on account better product mix and forex variation reimbursement of INR1.5b. Raw material cost declined 481bp YoY to 47%, and other expense increased 38.5% YoY to INR3.6b led by increase in provision done by the company. Reported net profit at INR8.0b was in line with our estimate (INR7.9b), Tax rate was higher during the quarter (26.1% vs 18.5% in 4QFY15) primarily on account of low in-house R&D as company has resorted to collaborative R&D.

– Maintain Buy: We maintain Buy with a price target of INR1,450/share—21x FY18E (near its peak historical valuation of 22x), to factor the improved pace of decision making in defense.