The PSU is building up capability across the defence electronics business in the wake of the government’s Make in India thrust
In February, the defence ministry selected a consortium of Bharat Electronics Ltd (BEL) and IT firm Rolta India as one of the two development agencies for the army’s Battlefield Management System (BMS), a project worth over R50,000 crore. That was a big win for the low-profile public sector firm; the big ticket programme to provide a real-time command and control capability to fighting units is part of the defence procurement procedure’s `make’ category and will be one of the largest defence solutions to be manufactured locally.
For BEL, which has been building up capability across the defence electronics business, this programme is among the many opportunities it will be eyeing over the next few years as more projects involving command and control systems and electronic warfare systems take shape. The project, which will likely have a cycle time of 5 years, requires the two consortia—the other one comprises Tata Power’s Strategic Engineering Division and L&T—to each develop a prototype of the system which will then be evaluated and put through a selection process.
India is currently the world’s biggest importer of defence equipment and the thrust on indigenous production, with a view to reversing this trend, could potentially translate into higher order flows for BEL. Citibank puts the opportunity at $245 billion over the next ten years.
And BEL is ready for the kill. A few days before the BMS project win, chairman and managing director Sunil Kumar Sharma had said during a media interaction the firm was expecting some good projects to materialise in the next 2-3 years. “BEL is one of the main players for most of the `make’ programmes. We are well-positioned, we have the technologies, talent, and are ready to take on the competition,” said Sharma.
The Bengaluru-based PSU ended FY15 with a sales turnover (provisional) of R6,671 crore, a growth of 8%. BEL, which exports electronic voting machines and high technology equipment like sonars, ship borne radars and communication equipment, clocked exports worth $58 million during FY15, a growth of 38%. The company plans to invest R400-500 crore, in the next two years, in a greenfield facility to integrate weapon systems and is working to acquire 900-1,000 acres for the facility in Andhra Pradesh’s Lepakshi region. “This is part of our expansion plan for weapon systems, we would like to create a specialised facility,” Sharma explained.
BEL is set to take up production of major systems for the Akash medium range surface to air missiles for the Indian Army—the company’s share of the order will be around R3,000-4,000 crore—with trials having been completed successfully. Meanwhile, it is the lead integrator for the Indian Air Force version of these missiles and is midway to delivering the order for eight squadrons.
Analysts see the company emerging from a four-year stagnation, between FY11 and FY14—when revenues and profits rose at a CAGR of 3-4%. “BEL has already begun to see a pick-up in execution as it is delivering its Akash missiles project and also as payments from its clients have been picking up. This reflects in the H1FY15 19% revenue growth,” Jefferies wrote in a January report.
Market watchers point out that government spend patterns, including capital spends, had seen a distortion in the last couple of years partly due to the national elections. But the new government’s thrust on indigenisation offers the swing factor. One assessment says that for every 5% of incremental indigenisation, BEL’s market pie rises by an incremental 17%.
The PSU has doubled its R&D spend as a proportion of sales in the past ten years, while its employee base is lower. “Being in the field of electronics and defence, it is important that we keep abreast of technology. So we are almost on level with some of the world class companies in our core technology areas and invest something like 15-20% of our turnover in R&D and organisation projects,” said Sharma, adding that several new products in the radars business have been added over the past couple of years. Last year, it also formed a joint venture with French defence company Thales to make defence and civilian radars for both domestic and global requirements.
Revenue from BEL’s defence portfolio had risen at a CAGR of 9% in the last 10 years, but by just 1% in FY14. Analysts put BEL’s market share at 44% in the defence electronics space which was opened to private sector participation a few years ago. The company has seen its revenue mix change over the past five years as it moved from a pure product-selling company to one that takes on contracts as a system integrator.
But the firm’s order book at the end of FY15 was smaller at R22,100 crore compared to around R23,200 crore a year ago and unless there is a strong accretion to order book, the revenue growth in FY17 could be muted. While the BMS order is significant in size and can potentially boost the order backlog, it might come in only in FY17-18 and the execution would take another 5-7 years. BEL said that some of the significant orders executed during FY15 included the Akash missile systems, passive night vision devices, tactical control radar, shipborne electronic warfare systems, hull mounted sonar, fire control systems, missile warning system and combat management system. “Our contracts are generally spread over 4-5 years,” Sharma said.
While BEL is well-positioned to tap the emerging opportunity, analysts point out that the speed of government decision-making will play a key role. Motilal Oswal in a March report pointed out that delayed decision making for defence procurements and increased competition from the private sector would be the key risks. The brokerage expects BEL to report a 13% revenue CAGR over FY14-17, largely supported by execution of the Akash missile project, and net profit to grow at a CAGR of 19% over the same period. There’s no mistaking it, BEL’s back with a bang.