Strong all-round performance…
Bharat Electronics (BEL) reported revenues at | 3189 crore, growth of 16.3% YoY, above our estimate of | 2502 crore on the back of normalising supply chain, Ventilator order and business operations leading to execution pickup. Absolute EBITDA for the quarter was at | 623.4 crore (vs. our estimate of | 329.4 crore) up 14.4% YoY. EBITDA margin was better than estimate at 19.6% (above our estimate of 13.2%) down marginally by ~30 bps YoY, owing to controlled operating expenses, better than expected execution. Hence, PAT came in at | 397 crore, up 16.9% owing to better execution, higher other income, which grew 82% to | 27 crore on a YoY basis.
Decent order inflows, sustainable execution key to growth...
For Q2FY21, BEL received bagged decent orders of ~| 1561 crore (| 4981 crore for H1FY21), which included advanced composite communications systems, electronic warfare system, naval fire control system and 3D surveillance radar. BEL continues to have a strong order book and order inflows. Order book as on Q2FY21 was robust at | 52148 crore (vs. | 53751 crore in Q1FY21). However, overall order inflows in FY21E may get impacted by deferral in some projects amid economic and fiscal challenges. Orders expected in H2FY21E include avionics package for light combat aircraft (LCA), Akash weapon system (Army), electronic warfare system, smart city business, etc. Going ahead, further pick-up in execution and a favourable product mix would help BEL stabilise base EBITDA margins at ~19-20%.
Operating performance, working capital key monitorables...
Overall, expected cut in defence spending amid economic challenges may lead to some deferral of receivables of defence PSUs including BEL. Hence, working capital will be closely watched in FY21E. However, expected sustained execution in FY21E would lead to a steady operational performance. Cash & cash equivalents for Q2FY21 increased to ~| 1124 crore (vs. ~| 1000 crore as on Q1FY21).
Valuation & Outlook
Overall, BEL reported strong execution for Q2FY21 and is expected to maintain the momentum stable for H2FY21E while order inflows may get impacted in the medium term due to a delay or deferral in a few projects but overall expected to be decent in current environment. BEL is likely to continue its focus to increase contribution from non-defence segment to ~20%, albeit with lower margins in the next three to five years. Overall strong order book of | 52148 crore continues to provide strong revenue visibility. We expect BEL to report revenue, EBITDA, PAT CAGR of 8.8%, 5.2%, 4.5%, respectively, in FY20-22E. We revise our target price to | 110 (13.5x on FY22E EPS) and change our rating from HOLD to BUY. Any disappointment on execution front may significantly impact the operating performance of BEL
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