Bharat Electronics rating – Buy: Prospects are strong for the company

Mgmt highlighted that 692 items have been uploaded on the Ministry of Defence indigenisation portal. EOIs for 69 items have also been published under Make-II.

Bharat Electronics (BEL) at the analyst meet mentioned that FY22e revenue growth should be at least 12-15% y-o-y, tad lower than the planned 15-17% y-o-y, as supply disruptions that impacted Q1FY22 ease off gradually. Visible Rs 180- bn FY22e order pipeline, indigenisation supporting margins and focus on increasing civil proportion of revenue to 25% vs 15% remain triggers. We raise our PT to Rs 244 (vs Rs 225) factoring in rollover to Sept 2023 EPS. Buy.

‘Make in India’ government focus clear: Mgmt highlighted that 692 items have been uploaded on the Ministry of Defence indigenisation portal. EOIs for 69 items have also been published under Make-II. BEL is providing test facilities to private vendors apart from participating. Company saw 13% revenue CAGR vs single-digit Defence Capital budget CAGR since indigenisation effort began in FY15. Focus again on domestic manufacturing should see this higher CAGR sustain.

Rs 558-bn order book is 4x FY21 revenues: Rs 53-bn orders have been received YTD and order book is 2% higher since Q1FY22. Rs 565 bn is the visible 3-year order flow pipeline. For FY22e, Rs 80-100 bn orders from the air force, Rs 40-50 bn from army and Rs 30-40 bn from the navy is the defence order flow potential. Rs 30-40 bn non-defence orders is incremental.

Civil focus does not need material capex immediately: Medical equipment manufacturing, homeland security, automatic tolling gates for railways, smart cities are focus areas for BEL. Rs 300-500 mn might be the annual incremental capex need, which could scale up ahead. Rs 5-6 bn is BEL’s annual capex run-rate. Company received a trial order from the Delhi Metro, which should convert to a larger order.

As good as it gets for near term and long: BEL de-rating on the back of the notification on lower margins began in April-May 2018 when it was trading at 18-19x 1-yr forward PE. Our PT of Rs 244 values BEL at 18x PE Sept. 2023 (v/s FY23e earlier) as the de-rating should reverse with margin delivery.