We maintain a ‘buy’ rating on Bharat Electronics (BEL) with a revised target of Rs 4,067 (earlier Rs 2,350). We expect BEL’s dominant status to sustain and believe it will be among the prime beneficiaries of opening up of the defence sector. With the new government likely to speed up defence ordering and execution, the company is well placed to tap the opportunity. We also anticipate exports to improve. The stock currently trades at 22x and 19x FY16e and FY17e earnings, respectively. We introduce and roll forward valuation to FY17e, valuing BEL at 24x P/E against 16x earlier given the strong pick up in execution and improved predictability in performance.
BEL sprung a pleasant surprise by reporting strong Q3FY15 numbers, which surpassed our and consensus estimates. Revenue jumped 34% riding robust execution primarily in missile systems, radar systems and night vision devices. The company’s exports also saw ramp up (up 68%), albeit on a small base. Ebitda margin at 17.3% catapulted 250 bps led by operating leverage despite dip in gross profit margin (down 310 bps). PAT jumped 42% driven by strong execution and operating performance. We continue to anticipate improvement in pace of orders over the next few quarters from armed forces given the government’s mandate to speed up piled?up defence deals. This, along with an improving outlook, places BEL in a sweet spot.
Healthy order backlog of Rs 22,000 crore despite muted order intake. The company’s order intake fell 18% to Rs 760 crore, which could be due to delay in awarding orders. A healthy order backlog renders visibility of 3x FY15e revenue. We expect ordering momentum to improve over the next few quarters.
Edelweiss