CMP : Rs 102 (07.07.2020)
Target : Rs 132
Period : 12 Months
Gains : 29%
52 Week H/L : 122 / 56
About Bharat Electronics Ltd.
Bharat Electronics Ltd., incorporated in the year 1954, is a Large Cap company (having a market cap of Rs 24877.61 Crore) operating in Defense sector.
Bharat Electronics Ltd. key
Products/Revenue Segments include Electronic Components & Equipment which
contributed Rs 10565.69 Crore to Sales Value (87.43 % of Total Sales), Sale of
services which contributed Rs 1223.53 Crore to Sales Value (10.12 % of Total
Sales), Other Operating Revenue which contributed Rs 284.13 Crore to Sales
Value (2.35 % of Total Sales), Rent which contributed Rs 6.27 Crore to Sales
Value (0.05 % of Total Sales) and Scrap which contributed Rs 4.98 Crore to
Sales Value (0.04 % of Total Sales)for the year ending 31-Mar-2019.
For the quarter ended 31-03-2020, the
company has reported a Consolidated sales of Rs 5728.57 Crore, up 151.46 % from
last quarter Sales of Rs 2278.08 Crore and up 51.42 % from last year same
quarter Sales of Rs 3783.32 Crore Company has reported net profit after tax of
Rs 1038.92 Crore in latest quarter.
Major share holding is Government of
India and the shares available for general public is only 6.0 %.
Q4 results above
expectations and makes up for all the previous three-quarter:
BEL reported
earnings were 12% better than our expectations as margins excelled offsetting
the black buster results in the previous nine months. Revenues grew by
49.5%/155% yoy/qoq to ₹58 bn, which were above our expectations as the company
executed the LRSAM project in a lumpy manner.
RM costs to
sales however moved up to 57.1% from 50.3% yoy and 56.2% qoq on execution of
low margin LRSAM project. This resulted in a 650-bps contraction in gross
margins. But in line with positive operating leverage, EBITDA margins improved
to 25.5%, a jump of 160 bps yoy.
Reduction in NWC
to sales at 28% in FY 20 v/s 34% in FY 19 was the most pleasing and surprising
aspect of the results. This was led by prudent vendor and inventory management,
while higher advances offset higher receivables.
This also
resulted in splendid OCF at ₹25 bn v/s ₹14 bn in FY 19, resulting into doubling
of cash at ₹15.6 bn. Total order book now lies at ₹ 520 bn (4x FY20 sales),
which included order inflows of ₹132 bn added during FY 20.
This was 44%
below FY 19 addition, mainly due to constrained defense budget and delays in
deployment of the same.
FY 21 to see
a deceleration in numbers on COVID backdrop, while FY 22 should be ballistic!
During the year,
BEL delivered various orders like LRSAM systems, Smart City and Homeland
Security business, Integrated Air Command and Control Systems, Radar Systems
and Thermal Imaging Cameras.
In FY 21, the
company is set to supply orders for Himshakti EW system, Avionics for Light
Combat Aircraft-Tejas Mk1A, Smart city/Homeland security projects, spares and
services. The company has also received an order to supply 30,000 advanced ICU
ventilators to the Ministry of Health which will be completely delivered by
August.
Though this
business will add approximately ₹6-7 bn to the top line in FY 21E, according to
our expectations, it will be a low margin business as the ventilators will be
sold economically. In line with this, we expect margins in FY 21 to fall at
16%. On the back of ventilators order, we expect top line growth of 6% in FY
21E, in absence of which we anticipate a fall of mid-single digit. Resumption
of international supply chain will be the key to its growth trajectory in FY
21E.
In FY 22, on the
back of weak FY 21 and strong order execution of its existing orders and
government’s improving outlook on defense orders, we foresee a robust comeback
with margins ranging within 21-22%.
Recent
approval of massive defense related proposals ensures strong visibility for BEL:
Last week, the
MoD approved to acquire 33 new fighter aircraft's from Russia and upgradation of
59 existing MiG-29s for ₹180 bn. It also cleared proposal to develop several
defense projects worth ₹390 bn of which ₹311 bn will be from Indian industry.
These projects
include Pinaka rocket launcher, BMP combat vehicles upgrades, software defined
radios for army, 248 Astra Beyond Visual Range air to air missiles for IAF and
Navy and New 1000 km strike range Land Attack Cruise Missile for the army, in
collaboration with DRDO. BEL being a stalwart in manufacturing most of these,
we believe it to be the prime beneficiary of this proposal, and achieve a
strong visibility in the ensuing years.
Outlook and
Valuation:
Q4 and FY 20
results well addressed street’s concerns about weak margins due to adverse
product mix and BEL’s high NWC and associated pressure on cash flows despite
weak operating environment. For FY 21, our numbers already factor in weaker top
line growth at mid-single digit excluding the impact of ventilators. We now
expect margins close to 16% on negative operating leverage and higher NWC
intensity of 31% in FY 21E v/s 28% in FY 20.
Similar to FY
20, we expect improvement to come by H2, but earlier than expected execution of
the above mentioned GOI proposal may lead to better than expected numbers in H1
too. The ongoing tension at the Indo-China border may expedite the process.
On the other
hand, we expect a superb rebound in FY 22 as we believe demand will remain
intact in the defense sector. Also, the recent announcement of the defense
proposal of procuring from domestic companies should aid top line and
profitability apart from allaying the NWC concerns in mid to long term.
In line with the
confidence gained viewing robust cash generation and dividend paying ability
and consistency (dividend yield at 4.2%) in FY 20, we do not envisage any
financial leverage in the next two years. In line with the moat of technology
and products that BEL is possessing which are encompassing readiness and future
of warfare, we maintain our strong BUY on the stock with a raised target price
of ₹132 based on 14x times FY 22 earnings.
We have slightly
raised our FY 22E estimates, while maintaining FY 21 earnings numbers.
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