Sharekhan has retained a Buy rating on Bharat Electronics (BEL) with an unchanged price target of Rs 152. Bharat Electronics Limited (BEL) reported an operationally strong quarter leading to higher net profit yoy, revenues were flat yoy although lower than estimates. Consolidated revenues came at Rs 2320 crore, which remained flat yoy (lower than estimates) on the back of lower execution (earlier, in H1, emergency execution of ventilator orders drove up revenues).

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Bharat Electronics higher gross margins (up 497 bps yoy) on better management of RM costs offset by higher other expenses lead to operating margins of 19.7% (up 400 bps yoy) better than estimates. Accordingly Bharat Electronics operating profit came at Rs 456 cr (up 27.9% yoy). Better operating leverage offset by lower other income (down 29.6% yoy), led to a 25% growth in net profit to Rs 278.5 cr (lower than estimates).

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Bharat Electronics order book remained healthy at Rs 54,791 cr. Earlier, Bharat Electronics management had indicated that it bagged orders worth Rs 7,500 cr till December (and another Rs 6000 cr+ orders under negotiation) and based on the healthy order pipeline, it is confident of achieving order inflows of Rs 15000 cr in FY21E.

On the order pipeline front, BEL cumulatively has a healthy pipeline including quick reaction surface-to-air Missile (QRSAM) opportunity order size of Rs 30000 cr over the next 5-7 years wherein Rs 15000 - 20000 cr of such orders should come through in FY22E-23E). Others include long-range surface missiles (Rs 15000-cr worth of LRSAM missile system order should come in FY22E) and opportunities in electronics warfare systems, Akash Weapon Systems (Army) sensors and drones, etc.

Earlier in the quarter, BEL has also bagged an order for procurement of 10 Lynx U2 Fire Control systems for frontline warships of the Indian Navy for Rs 1355 cr under Buy (Indian) category being developed indigenously.

Bharat Electronics has also signed a contract with Indian Navy to supply 20 laser dazzlers, a non-lethal weapon for warning and stopping suspicious vehicles, boats and aircraft, which would be manufactured by BEL‘s Pune plant. BEL remains well-placed to tap on upcoming opportunities under the government’s AatmaNirbhar Bharat programme.

In the upcoming Budget, there is an expectation of further push to defence initiatives with higher defence allocation along with fast approvals to pending projects which would further give fillip to the AatmaNirbhar Bharat initiative benefiting companies like BEL. Bharat Electronics strong execution track record and a strong order book provide healthy revenue visibility ahead.  

Bharat Electronics Key positives:

OPM improved 400 bps yoy on the back of better gross margins (up 497 bps yoy)
Healthy revenue visibility owing to healthy order book of Rs 54791 cr

Bharat Electronics Key negatives:

Revenues were flat yoy on lower execution

Bharat Electronics Key risks:

Heightened competition, delayed execution of orders, and slower pace of fresh order intake might affect revenue growth. Higher raw-material prices and increased competitive intensity might put pressure on margins.