Govt’s ‘Make in India’ focus likely to sustain growth; margin delivery will reverse de-rating; ‘Buy’ maintained
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.