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Healthy order inflow; execution pickup to follow

Bharat Dynamics’ (BDL) Q2FY23 EBITDA was up 42% YoY (123% QoQ) at Rs939mn. Key highlights: i) EBITDA margin expanded to 17.5% in Q2FY23 (Q2FY22: 13.1%; Q1FY23: 6%) and gross margin too remained healthy at 55.4%. ii) Working capital unlocking of Rs872mn resulted in robust cashflow from operations at Rs1.47bn. iii) Orderbook stands at ~Rs120bn (4.3x FY22 revenue), indicating enough headroom for growth. In our view, BDL stands on the cusp of growth with strong possibility of orderbook build-up, higher exports revenue and EBITDA margin increasing to 20-23% over next 3-4 years. Furthermore, the investments to augment capacity include establishing Seeker Facility Centre and Warhead Production facility along with three new upcoming facilities at Ibrahimpatnam (Telangana), Jhansi (UP) and Amaravati (Maharashtra) – which are likely to aid earnings growth. We reinitiate coverage on the stock with an ADD recommendation. Our target price of Rs1,100/share is based on the DCF methodology, and implies P/E of 30.7x FY24E EPS.

* Strong Q2FY23 performance. BDL posted robust performance in Q2FY23. Key points: 1) Q2FY23 EBITDA of Rs931mn grew 42% YoY on sound execution of more profitable orders, 2) total cost declined 33% YoY to Rs.4.4bn, and 3) comfortable orderbook of Rs120bn (4.3x FY22 revenue) executable over next 3-4 years. Going ahead, we expect performance to improve further as management expects: 1) orderbook position of Rs250bn in next 2-3 years, primarily due to orders for Akash 3 rd and 4th regiments, and MRSAM missiles from the Indian Navy; 2) FY23 revenue likely at Rs30bn-35bn with double-digit growth from FY24 onward; 3) EBITDA margin in the range of 20-23%; and 4) exports at 10% of total revenue.

* Product pipeline looks attractive. BDL’s product pipeline is impressive and can translate into a significant orderbook addition in the near term. The key components are: 1) Akash 3rd and 4th regiment orders for the Indian Army and ‘Astra beyond visual range air-to-air missiles’, expected to result in Rs130bn in order inflow in the medium term; 2) VSHORAD, smart anti-airfield weapon orders and ATGM; 3) DRDO has successfully test-fired VL SRSAM with seeker and QR SAM, in which BDL team is involved in testing and integration. Recently, BDL signed a contract with MoD for Rs29.7bn worth of manufacturing and supply of Astra MK-1 to IAF and Navy. BDL launched three new products during Defexpo’22: i) Anti-tank guided missile for MBT ARJUN, ii) the Sangramika, a light-weight vehicle-mounted anti-tank guided weapon system, and iii) the Sanharika, an armoured vehicle-mounted laser-guided shortrange anti-aircraft weapon system. Based on the strong orderbook and product pipeline, we see good potential for future earnings growth.

* Outlook: Good times ahead. We perceive salubrious times for BDL as both earnings and margins are expected to improve. We reinitiate coverage on the stock with an ADD rating and target price of Rs1,100 based on DCF methodology.

* BDL entered into MoUs during Defence Expo 2022. BDL and Dassault Aviation Pvt Ltd have entered into an MoU for integration of BDL’s weapon systems like Astra and ‘Smart Anti-Airfield Weapon’ on Rafale aircraft for Indian Armed Forces and future export market. BDL and IIT, Ropar, have entered into an MoU to work on joint research projects and technology development for all missiles and underwater weapons. In addition, BDL has also signed MoUs with other organisations including Ashok Leyland Defence Systems Limited, Mahindra Defence Systems, Newspace Technologies, etc.

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