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Gradual ramp-up expected in execution

Maintains FY22 guidance despite miss in 1QFY22

* Bharat Electronics (BHE)’s 1QFY22 revenue came in 32% below our estimate, with the miss attributed to lower execution on account of the COVID disruption. With lower execution and elevated commodity costs, the EBITDA margin stood at 3.8% (v/s 8.8% YoY), largely attributable to the lower absorption of fixed costs, such as employee expenses.

* The margin depends on the sales mix between deliverables; hence, it tends to be volatile on a quarterly basis. BHE’s current order book is strong at INR545b, with an OB/revenue ratio of 3.9x. The company maintained its revenue guidance at 15–17% growth and margin guidance at ~22% for FY22, and is confident of achieving this despite the miss in 1QFY22.

* While its 1QFY22 performance has been below expectations, we believe BHE has sufficient levers to recover lost sales over 9MFY22 and meet its guidance. Notably, 1Q has historically contributed 10–15% to the topline (over FY15–20). While we cut our FY22E EPS by 5%, we broadly maintain our FY23–24E EPS and forecast a revenue/EBITDA/PAT CAGR of 11%/8%/10% over FY21–24E. Our TP stands at INR205/share (20x FY23E EPS). Maintain Buy.

Disappointment across parameters

* 1QFY22 snapshot: Revenue stood at INR16.3b (flat YoY) and was 32% below our estimates. EBITDA stood at INR629m (down 57% YoY and 85% below our estimates). EBITDA margins came in at 3.8% (v/s 8.8% in 1QFY21). PBT stood at INR152m, aided by higher other income (INR447m v/s our est. of INR250m). Adj. PAT was down 79% YoY to INR112m (v/s our est of INR2.5b).

* Order inflows stood at ~INR26b, with OB strong at INR545b (OB/rev ~3.9x).

Highlights from management commentary

* BHE is working on entering newer segments, including lithium ion battery manufacturing. The lithium ion technology is not a new area for BHE as the company has been using it in defense applications for over a decade. It has initiated discussions with OLA and could start manufacturing lithium ion batteries if the discussion materializes. In this case, BHE would apply for PLI as well.

* BHE expects more than INR150b worth of order inflows in FY22. Large orders such as D-29 and Himshakti are expected to come in 2QFY22.

* The management expects INR10–15b worth of orders per year from the Metro business from FY23.

Valuation and view

* We forecast a revenue/EBITDA/PAT CAGR of 11%/8%/10% over FY21–24E. We have built in a sufficient margin cushion as we assume an EBITDA margin of ~21% over FY22–24 (v/s 22.6% reported in FY21). Our TP stands at INR205/share (20x FY23E EPS).

* At CMP, the stock trades at 18x/17x FY22E/FY23E P/E, despite RoE/RoCE of ~19%/20% (FY23E), dividend yield of ~2%, and FCF yield of 2–4%. We maintain a Buy rating. Higher growth in the non-Defense business poses an upside risk to our EPS estimates, while working capital deterioration poses a key downside risk to valuations.

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