Bharat Electronics (BEL) sustained its execution and OPM beat trend for the third consecutive quarter in Q2FY18. Key highlights: (i) benefits of order book ramp-up now reflecting in higher execution, which we believe is sustainable over FY18-20 given the strong pipeline; (ii) healthy order intake pipeline with high-value projects like LR-SAM etc., likely to be awarded in H2FY18 potentially aiding BEL’s Rs 160 bn plus FY18E intake (H1 at Rs 56 bn, up 9% y-o-y); and (iii) we believe, BEL is fully equipped to clock robust double-digit topline/order book growth over FY17-19 with stable OPM. We continue to perceive BEL as one of the largest listed defence bets despite the stock rising 5.8x over the past 4 years. We revise up FY18/19E EPS 3/6%, leading to revised TP of Rs 240, given best-in-class earnings/RoE (excluding cash) visibility. Maintain Buy.
What do we expect going ahead? We expect BEL to continue to post healthy topline growth led by a robust Rs 417 bn order book. We estimate margin to remain stable given that more than 50% orders are still on nomination basis and most large contracts entail limited outsourcing scope.
Outlook: BEL continues to remain our top pick in the defence sector given the strong government push and the company’s strategic positioning. We believe, large orders in the pipeline translating into double-digit order book spurt and sustainable OPM are key value drivers.