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Strong performance in FY21

Bharat Electronics’ (BEL) reported higher than expected FY21 provisional revenues (in-line with guidance) at Rs135bn. This highlights the i) buoyancy in defence budget seen over CY20 ii) BELs’ ability to keep diversifying its revenue stream as indicated by the execution mix and iii) BEL’s ability to execute in an accelerated manner 30,000 ICU ventilator. We believe, the risks to a constrained defence budget have largely reduced over the events of the past year, specially for defence primes like BEL. Management has earlier guided towards higher capex run rate to achieve double digit revenue growth (10-15% YoY capex growth p.a. from the likely Rs5.5bn in FY21E). We upgrade BEL to BUY from REDUCE with a revised target price of Rs153/share (from Rs121) based on FY23E PE of 15x.

* FY21E order inflow inline with Guidance at Rs150bn. FY21 end orderbook stood at Rs530bn. Some of the major orders acquired during the year are ICU ventilators, software defined radios & communication equipment, radars, sonars, torpedo decoy systems, Electronic Warfare systems, Networking & Encryption products, smart cities etc.

* Execution much higher than expected at Rs135bn (I-Sec Rs 121bn). This has been driven by ICU Ventilators, Missile Systems (Akash & LRSAM), Gun Upgrades, Various Radars, Various Sonars, Command & Control Systems, Electro-optic systems, Communication & Encryption products, EW Systems, Coastal Surveillance System, Electronic Fuzes, Home Land Security & Smart City Projects, KFON, Avionics Package for LCA etc. BEL achieved export sales of ~ US$50mn during FY21. Major products exported include Coastal Surveillance System, Trans-Receive (TR) Modules, Bharati Radio, Identification of Friend or Foe-Interrogator (IFFI), Electro-optic system compact multi-purpose advanced stabilization system (EOS CoMPASS), Electro-mechanical parts, Radar Finger Printing System (RFPS), Low Band Receivers (LBREC), Spares for Radars etc.

* Near-term order opportunities. BEL has already accounted for execution of avionics related to LCA Mk 2 as HAL has received LoI for the same. Key elements of the avionics package for LCA Mk 2 include Fly by Wire Digital Flight Control Computer (DFCC). Future opportunities include Jammer for LCA. Also, LUH and LCH (helicopters) may allow sensors (MAWS and counter-measure dispensers along with HMDS) and weapons to significantly augment BEL’s avionics revenue.

* BEL targets i) civilian segment (including medical equipments) to increase from 7% of topline to 15% in the next 2-3 years; ii) to increase the current 10% revenue contribution from service sector (including AMCs); iii) capture a pie of the revenue expenditure budget of the Armed Forces via entry into electronic fuses and RF seekers (new complex in Machilipatnam to be commissioned soon); and iv) gain share in the base business, i.e. integration of missile complex (Palasamudram; another separate SBU for QRSAM in Bengaluru), entry into ammunitions, etc.

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