Buy Bharat Electronics Ltd Ltd For Target Rs.102.5 - HDFC Securities
Bharat Electronics Ltd. (BEL) is India’s leading player for meeting the country’s defense electronic needs with ~55% market share. BEL bagged orders worth of Rs. 3419 crore in Q1FY21 and has a robust order book of Rs. 53752 crore as at end of Q1FY21. The recent initiatives by the Government like “Make in India” and “Atmanirbhar Bharat” provides humongous opportunity to the company as the reliance on imports for the defense sector would reduce which in turn would help the company. BEL has competitive advantage due to its strong in-house capabilities and joint R&D focus with DRDO (Defence Research & Development Organisation). BEL has also been exploring opportunities for growth in allied defense and non-defense areas. Share of non-defense revenues in FY20 was 18% of total revenues. We believe recent events on the border front and Government efforts for being “vocal for local” coupled with the recent embargo on import of 101 defence items provides company a lasting opportunity over the coming years.
Valuations and Recommendations:
BEL has strong order book of Rs. 53752 crore as on Q1 FY21 which translates into 4x FY20 revenues. Order book is a key indicator for the revenue visibility for the company. Expected order inflows for EW system (Electronic Warfare) and Avionics Package for Light Combat Aircraft in FY21 is further likely to drive order inflows thereby improving revenue visibility for the company. BEL has guided revenue growth of 7-10% and a tad bit improvement on the margin profile in FY21E. The company also earns large chunk of revenues and profit in the fourth quarter, thereby facing seasonality. The execution of orders will face headwinds due to the pandemic as there will be delay or deferral in a few projects. The company’s focus to diversify its revenues streams through non-defense and exports to friendly countries augurs well in current turbulent times. The stock is currently trading at ~12.7x FY22E earnings.
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