Analyst Corner: BEL – re-rating depends on working capital management

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Published: April 7, 2020 1:20:29 AM

BEL has demonstrated strong execution capability over the years and is well placed in the current troublesome time of Covid-19.

Overall, FY20 revenue is ~9% above our estimate for the full year.Overall, FY20 revenue is ~9% above our estimate for the full year.

In a communication to the stock exchanges, Bharat Electronics (BEL) has mentioned that it ended FY20 with record turnover of over Rs 125 bn (+6% y-o-y). The BEL management has further stated that execution could have been higher, if not for the Covid-19 outbreak and the economic slowdown. Execution/acceptance of some major projects could not be completed due to force majeure. Adjusted for the VVPAT/EVM revenue of Rs 26 bn last year, FY20 revenue growth stands at 35% y-o-y. For Q4FY20, the implied execution is likely at Rs 57.3 bn (+48% y-o-y) and better than our expectation. Overall, FY20 revenue is ~9% above our estimate for the full year.

Key projects executed in FY20 include Command & Control Systems, Thermal Imagers for tanks, Upgrades of communication systems, Land-based EW systems, Weapon Repair Facility, Electronic Fuses, various Radars, Smart City Projects, Delhi CCTV project, Schilka upgrade, Avionics Package for LCA, Classroom Jammers, Real Time Information System for Railways and LRSAM. We believe that LRSAM orders entering execution mode now has supported the strong execution.

The total order inflows for FY20 stood at Rs 130 bn. Key new orders include Akash (7 Sqdn), Coastal Surveillance Systems (CSS), Upgrade for EW systems, Radars, AMCs for Radars and Weapon systems, Software Defined Radio (SDR), Sonars, Advanced Communication Systems, etc.

FY20 order book stood at Rs 518 bn (flat y-o-y). This translates into Ob/Rev ratio of 4x, providing strong revenue visibility over the next 3 years. BEL has demonstrated strong execution capability over the years and is well placed in the current troublesome time of Covid-19.

While we remain confident of BEL’s execution capability and believe it is the best play in the Indian defence sector, we believe the company’s re-rating depends on its working capital management. Working capital has deteriorated from 9.8% in FY17 to ~34% currently, leading to negligible FCF generation over the past 4 years. With the government’s fiscal deficit likely to come under pressure owing to the economic downturn and Covid-related spending, there are risks of working capital worsening further.

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