Initiate ‘buy’ coverage on Bharat Electronics (BEL) and assign price target of Rs 3,700, valuing the stock at 22x P/E FY17e, close to peak historical multiples. BEL is a market leader in domestic defence electronics, with 75% of its defence revenues coming from the navy and the army. With zero debt and improving working capital, it is well placed to benefit from the defence opportunity. It has tied up with Thales, France, one of the global majors in defence electronics, for product development. In the next 12-18 months, strong order flow growth, coupled with 14% earnings CAGR during FY14-17e, ROE improvement to 15% from 13-14% levels and brighter prospects beyond FY17e should see the stock re-rate.
The new government has been clear in its focus on defence and its indigenisation. Orders worth $32 billion have been fast-tracked. We expect 22% CAGR in FY14-20e for the domestic defence industry and hence initiate coverage on the stock.
India’s capital defence spend was $13 billion in FY14, accounting just 4% of the US’ and 12% of China’s spend. Post the new government formation, $32 billion of defence equipment orders have been fast-tracked, with discussions on an incremental $88 billion. We believe India’s capital defence spend will rise at 16% CAGR in FY14-20e versus 10% in FY05-14.
Jefferies