Maintain ‘outperform’ on Bharat Electronics (BEL) on signs of revival in order inflow. We expect earnings to register a CAGR of 10% over FY15-17 and see the pace increasing thereafter as execution picks up.
The stock trades at 18x FY17E earnings, which we believe is attractive given the long-term earnings potential.
Defence spend is seeing an uptick due to government focus on modernizing the defence forces, which is visible in the faster project clearances by the DAC. Given leadership in the defence electronics segment and focus on R&D (8% of FY15 revenues), BEL is well-positioned to capture the growing defence spend. We believe BEL’s order backlog of R21,000 crore (~3x FY15 revenues) provides strong visibility of revenues and earnings.
After a lull in order intake momentum over the past 3-4 years (~R5,000 crore per annum), BEL’s order intake is likely to cross R10,000 crore (up 95% y-o-y) in FY16 as decision-making on defence procurement has been improving. BEL has seen intake of R2,300 crore year-to-date and is L1 in an order worth R7,000 crore (Integrated Air Force Command and control system – IACCS).
The government’s focus on improving and modernising the defence forces has led to faster decision-making on procurement. This is reflected in a pick-up in project approvals by the Defence Acquisition Council.