We initiate coverage on BEL with an Outperform rating and target price of R1,800 based on steady growth visibility and reasonable valuations. We expect 15%/14% revenue/earnings growth on the backlog of R350 bn and strong inflows.
India is one of the largest arms buyers, with a high import dependence. BEL is the key beneficiary of extant spending and a focus on increasing indigenisation. The private sector is also vying for business but is facing issues of trust, limited actual investments, and thus facilities, long-term commitment and long gestation. BEL has broad-spectrum horizontal capabilities in electronics, communications and software, and has emerged as a large system integrator as well.
We expect an average order inflow run rate of R135 billion p.a. during FY17-19E (backlog of R350 billion at H1 FY17-end) to drive growth on the back of a large opportunity basket. BEL has ~nil Wcap, RoE of ~20% and generates strong cash flows. Valuations look reasonable at 16x FY19E P/E in the context of global defence and Indian cap goods peers. Key risks: (i) execution, (ii) technology, (iii) pay hikes, and (iv) project-specific profitability.
Largest arms buyer; changing tack
India is one of the largest arms buyers, with a high degree of dependence on imported equipment. BEL stands out as a key beneficiary of extant spending and a focus on increasing indigenisation. We expect BEL to see 15%/14% revenue/earnings growth.
BEL benefits from dominant sector presence
Bharat Electronics has broad-spectrum horizontal capabilities in electronics, communications and software that cut across many verticals. BEL has emerged as a large system integrator with projects such as the Akash Missile. BEL has the advantages of a strong knowledge base, manufacturing and test facilities and R&D spend (10% of revenue; R7 billion). BEL benefits from the R&D efforts of DRDO (budget of ~R150 billion). BEL is a preferred partner and has JVs with many global defence majors.
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Strong growth, returns and cash generation visibility
We expect an order inflow run rate of R135 billion p.a. on average during FY17-19E on top of a backlog of R350 billion as at the end of H1 FY17. Growth could accelerate further as BEL is a frontrunner in several large opportunities, such as battlefield management systems and tactical communications systems. BEL has been able to manage an efficient business so far with an RoE of 20%. Revenue growth has accelerated post the slow growth period of FY11-14, and we expect this acceleration to strengthen further on the back of recent inflows.
Initiate with Outperform; reasonable valuation
We rate BEL as Outperform with TP of R1,800 (20X Mar-19e EPS) based on steady growth visibility (14% earnings CAGR over FY16-19e) and reasonable valuations (16x FY19e P/E for strong RoE of ~20%, strong cash generation and long-term growth visibility).