Bharat Electronics – Order inflow and execution continue to impress – ICICI Securities

Bharat Electronics’ (BEL) continues to impress with 9% annual growth on the top line and 150bps annual self-expansion of EBITDA margin for FY21 – a year with almost lost Q1FY21 (revenue fell 20% year on year in Q1FY21) due to the pandemic. There is a working capital release of Rs 23 billion for FY21, driven by Rs 28 billion from a working capital release of H2FY21 – another remarkable statistic. In addition to the achievements, the order is 152 billion rupees (~ Rs54 billion for Q4FY21), thus maintaining a healthy book to invoice of 3.9 times for the FY21E (standalone) top line of ~ Rs140bn. The presentation of BEL continues to stand out (performance + margin + visibility of the order book) in the listed DPSU space. We continue to support BUY with a revised target of Rs177 (Rs153 earlier)

– FY21 influx of orders at Rs152bn. The order pipeline for the FY22 is also quite visible with ~ Rs125bn from missile orders to BDL and Rs380bn from LCA Mk1A orders to HAL. Q4FY21 witnessed Rs10bn’s influx of software-defined radio (tactical) orders for the Indian Navy. The possibility of SDR is also significant, as BEL already offers a version of SDR (naval combat) and SDR-Air is under evaluation.

– Opportunities for short-term order. BEL has already accounted for the avionics performance associated with LCA Mk 2, as HAL has received an LoI for the same. The main elements of the avionics package for the LCA Mk 2 include the Fly by Wire Digital Flight Management Computer (DFCC). Future options include Jammer for LCA. Also, LUH and LCH (helicopters) can allow sensors (MAWS and countermeasures dispensers together with HMDS) and weapons to significantly increase BEL avionics revenues.

– The burden will be on diversification and implementation. BEL’s objectives: i) to increase the civilian segment (including medical equipment) from 7% of the upper line to 15% over the next 2-3 years; (ii) increase the current contribution by 10% of revenues from the services sector (including AMC); (iii) capture a share of the armed forces’ revenue budget by entering electronic fuses and radio frequency finders (a new complex in Machilipatnam will be introduced soon); and (iv) to gain a stake in the core business, ie. integration of a missile complex (Palasamudram; another separate SBU for QRSAM in Bengaluru), entry into ammunition, etc. Diversification beyond the core business (Indian defense) is key to achieving medium-term visibility of double-digit revenue growth.

– Maintain the BUY. We value BEL at 17x FY23E gain (against 15x FY22E earlier). We support BUYING with a revised target price of Rs177 / share. BEL continues to surprise in terms of performance, margins, order flow, growth, although it has reached a commendable scale (compared to India’s defense budget) – FY21’s performance underscores the strength of the strong business model.

Shares of BHARAT ELECTRONICS LTD. last traded on BSE at Rs.168.35 compared to the previous close of Rs. 151.35. The total number of shares traded during the day was 5211029 in over 28803 transactions.

Shares reached a daily high of Rs. 169.95 and a minimum for the day of 152.5. The net turnover during the day is Rs. 853901529.