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Execution in top gear; Working capital remains key monitorable
* FY20 revenues at record highs: In a communication to the stock exchanges, Bharat Electronics (BEL) has mentioned that it ended FY20 with record turnover of over INR125b (+6% YoY). The BEL management has further stated that execution could have been higher, if not for the COVID-19 outbreak and the economic slowdown. Execution/acceptance of some major projects could not be completed due to force majeure. Adjusted for the VVPAT/EVM revenue of INR26b last year, FY20 revenue growth stands at 35% YoY. For 4QFY20, the implied execution is likely at INR57.3b (+48% YoY) and better than our expectation. Overall, FY20 revenue is ~9% above our estimate for the full year.
* Execution of large ticket size orders leads revenue beat: Key projects executed in FY20 include Command & Control Systems, Thermal Imagers for tanks, Upgrades of communication systems, Land-based EW systems, Weapon Repair Facility, Electronic Fuses, various Radars, Smart City Projects, Delhi CCTV project, Schilka upgrade, Avionics Package for LCA, Classroom Jammers, Real Time Information System for Railways and LRSAM. We believe that LRSAM orders entering execution mode now has supported the strong execution.
* Order inflows at INR130b: The total order inflows for FY20 stood at INR130b. Key new orders include Akash (7 Sqdn), Coastal Surveillance Systems (CSS), Upgrade for EW systems, Radars, AMCs for Radars and Weapon systems, Software Defined Radio (SDR), Sonars, Advanced Communication Systems, etc.
* Order book remains robust at INR518b: FY20 order book stood at INR518b (flat YoY). This translates into Ob/Rev ratio of 4x, providing strong revenue visibility over the next 3 years. BEL has demonstrated strong execution capability over the years and is well placed in the current troublesome time of COVID-19.
* Working capital remains key monitorable: While we remain confident of BEL’s execution capability and believe it is the best play in the Indian defense sector, we believe the company’s re-rating depends on its working capital management. Working capital has deteriorated from 9.8% in FY17 to ~34% currently, leading to negligible FCF generation over the past 4 years. With the government’s fiscal deficit likely to come under pressure owing to the economic downturn and COVID-19 related spending, there are risks of working capital worsening further.
* Better placed in turbulent times of COVID-19: We see limited impact of COVID-19 on India’s defense sector spending, which has already been curtailed to the lowest level (as % of GDP). According to media articles, BEL may be roped in for manufacturing ventilators. If this materializes, it can open up a new ~INR10b revenue stream for the company over the next 2 months, which can offset part of the revenue loss, if any, due to the COVID-19 lockdown.
* Valuation and view: We increase our FY20 earnings estimate by 9% owing to the revenue beat, but largely maintain our FY21/FY22E estimates. We forecast revenue/EBITDA/PAT CAGR of 11%/9%/12% over FY20-22E. We lower our target multiple to 12x from 16x earlier, which is 1SD below its long-term average due to concerns over working capital cycle. Maintain Buy with reduced TP of INR86 (Prior: INR115) based on 12x Mar’21E EPS.
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