We maintain ?buy? rating on Bharat Electronics (BEL), backed by a pick-up in execution in FY14e and improved revenue mix. However, we lower our FY14/15 earnings by 2-6% on cut in margin estimate. As a result, our price objective is lowered to R1,520 (from R1,542 earlier).
We use PE and DCF as our primary valuation tools. We derive our price objective from the average of the two valuation methods. We assign a target PE of 12x to our FY14e estimates.
The management has highlighted improved revenue mix, margin revival, no immediate threat from private sector and robust canvas of new orders for FY13-15e. However, two near-term issues pertaining to FY13 order inflows and FY14 execution may limit possibility of an immediate re-rating.
BEL has received production clearance for R2,200-crore projects. BPC for 3DTCR (R1,440 crore) is expected by March 2013 ? improving FY14e revenue visibility. We also expect a change in FY14e revenue mix based on defence orders with high in-house component and lower social orders. A shift in revenue mix, coupled with flat employee expenses and higher O&M revenue, should lead to margin expansion (340 bps FY13-15).
BEL highlighted R33,000 crore of negotiated new orders over the next three years. In addition, R50,000 crore orders where it competes with private players. We believe BEL remains insulated from private competition in near-mid-term due to its relationship with clients, knowhow of legacy systems and long gestation timelines in decision-making. Its FY14e order inflow target is R10,000 crore versus our estimate of R8,040 crore.
We learn that the FY13 order inflow guidance of R7,000 crore is contingent on an R2,000-crore order from the Army for Weapon Locating Radars, which are to be fitted on Tatra trucks. However, due to the controversy around Tatra, the order has been referred to an expert panel that will give its verdict by March 2013.
In case BEL is made to re-fit its radars on a truck of a different OEM, it would take six months to do so. The company is also in the process of negotiating with the Army on changes in contract of a R2,540-crore Battlefield Surveillance System order that could impact its FY14 execution. Clarity on this is expected by Q4FY13.
BofA ML