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Our Take:

Bharat Electronics Ltd. (BEL) is India’s leading player in defence electronics sector. It has 55% market share. BEL bagged orders worth Rs. 2700 crore in Q1FY22, led primarily by order for indigenous products segments as Electronics Voting Machine and Electric Vehicles pack, Oxygen concentrators and Dhanush Weapon systems. As of Q1FY22, BEL has a robust order book of Rs. 54,600 crore. The recent initiatives by the Government, like “Make in India” and “Atmanirbhar Bharat” and new DPPEP -2020, provides humungous opportunities for the company.

Reliance on imports for the defense sector would gradually reduce and in turn help the company garner higher revenues. BEL has competitive advantage due to its strong in-house capabilities, joint R&D focus with DRDO (Defence Research & Development Organisation) and preference it gets for orders, as it is a defence PSU. BEL has also been exploring opportunities for growth in allied defense and non-defense areas. Share of non-defense revenues in FY21 was 22% of total revenues. We believe Government efforts towards being “vocal for local”, coupled with the recent embargo on import of 101 + 108 defence items, provides company a better growth opportunity going forward.

Valuation & Recommendation:

We believe strong order book, focus on moving up the value chain, innovative products, renovation of existing products for India’s defence forces and several initiatives under DPEPP 2020 would fuel growth of domestic defence ecosystem and exports business. All these should fuel growth of BEL. BEL is well-positioned for best play in India’s defence industry. Rising defence capex, a strong manufacturing base and execution track record, its relationship with defence and government agencies, preference as a DPSU compared to private players, its foreign technology transfer deals for new developments, its robust research & development capabilities and higher focus on exports to friendly countries are positives for BEL.

We believe BEL stock has enough room for n an upside in its valuation, in near to medium term, due to the competitive advantage compared to peers, aggressive cost cuttings and it being the most efficient player in the domestic defence ecosystem. BEL has raised the revenue per employee by more than 3x and EBITDA per employee by more than 5x in the last one decade due to its efforts on enhancing productivity and value addition. The management has guided for 15-17% top line growth for next two years, and EBITDA margins sustaining at 20-22% over near to medium term. It expects strong order intake of Rs. 15000-17000 crore per annum over 3-4 years.

It is undergoing Rs. 1,800 crore capex to boost its manufacturing, R&D and diversification needs. Its strong order backlog at Rs. 55,800 crore (Sept 21 end), 4x FY21 revenues provides strong revenue visibility. The company expects non-defence revenues to comprise 25-30% of total revenues over next two years from 20% in FY21. It expects SaaS SBU to grow into Rs.5000 cr order book, along with a sizable business in metro/medical devices etc.

AMC business could grow from 10–12% of revenue, to ~25% over 3–5 years when large systems (IACC, Akash, etc) move beyond warranty-support. Defence Public Sector Undertakings (DPSUs) have undergone tremendous change in their work ethos, accountability, execution timelines and capital allocation.

Employee productivity has improved every year over the past decade. ‘Atmanirbhar Bharat’ programme now has a much higher chance of success, which would benefit both DPSUs and the private sector. Strong R&D setup has enabled BEL to climb up the value chain. BEL is the best play in India’s defence sector with strong order book of 54,600cr, which provides healthy 15-18% revenue growth visibility over the next 2-3 years. The stock is currently trading at 17x FY23E EPS. Hence, we feel investor can buy the stock at LTP (17x FY23E EPS) and add more on dips to Rs. 189 band (15.5x FY23E EPS) for the base target of Rs. 237 (19.5x FY23E EPS) and bull case target of Rs. 256 (21x FY23E EPS) over the next two quarters.

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