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Preparing for launch

We hosted the Bharat Dynamics (BDL) management for a meeting with investors on 13th Jun’23. Key points: 1) orders pertaining to several defence programmes are expected post FY25 in association with DRDO, BDL’s own R&D and collaboration with foreign players; 2) company is ready for QRSAM production as limited validation trials got over in Apr’23; 3) trials have been completed for NAG ATGM and an RFP is expected in FY24; 4) PNC has been concluded for Konkur-M and Akash Prime systems; orders are expected in FY24; 5) company maintains its unwavering focus on exports.

Despite revenue growth remaining elusive thus far, we see several bright spots for BDL as significant order inflow is expected FY25 onward. Besides, exports comprise more than 10% of the orderbook (highest among the DPSUs), which diversifies the revenue base more efficiently. In our view, revenue pick-up is likely from FY26E and we expect revenue in FY27E at 2x FY24E levels. We prune our FY24E/FY25E estimates by 21%/8% as execution is likely to gain momentum from FY26E. However, owing to earnings growth from FY27E, our revised target price works out to Rs1,325 (earlier: Rs1,175) on DCF-based valuation methodology. Maintain BUY.

* Order accretion and pick-up to gather pace post FY25. We see BDL on the cusp of significant earnings growth and capability-building. Key points: 1) orderbook as at May’23-end is at Rs204.1bn, implying a healthy bill to book (ttm) of 8.2x; order inflow in Apr-May’23 was Rs5.2bn; 2) company expects QRSAM, HELINA ATGM and NAG ATGM orders in FY26 and Akash NG, VLRSAM and MPATGM orders in FY27 in association with DRDO; 3) company is actively engaged with IAF to finalise the contract for procurement of an indigenously-developed smart anti-airfield weapon (SAAW); the DRDO has conducted tests for two different configurations of the SAAW; BDL expects the order in FY27; 4) our channel checks indicate that the company is also considering development of low-cost air-launched variant of AMOGHA-III ATGM; 5) in the near term, BDL is expecting orders pertaining to LBRM, Spike ER2 and 70MM LGR. These are being developed with foreign collaboration. Management has guided for a target revenue of Rs32bn and EBITDA margin of 20-23% in FY24. Besides, R&D investment is likely to be 2-4% of revenue (FY23: 6.11%). In our view, the revenue thrust is likely to come from FY27E contingent on ordering approximately in line with our expectations.

* Exports and underwater weapons: an under-appreciated area. BDL’s export orderbook of Rs26bn comprises more than 10% of its total orderbook – highest among PSUs, comprising recently received export order worth US$255mn for SAMs and US$27mn for ATGMs. The strong orderbook provides the company ample opportunity to diversify its earnings base. In the area of underwater weapons, the combat heavyweight torpedo has been fired successfully and it met all parameters. Company is expecting orders for ‘electrical heavyweight torpedo’ in FY26 and ‘advanced lightweight torpedo’ in FY27. We expect an enhanced revenue contribution from underwater weapons in the near future.

Outlook – Good times ahead. We perceive BDL as an attractive investment opportunity for the medium term as both orders and execution are likely to pick pace. While the current stock price factors-in some of the future opportunities, we believe that successful testing in the near term and revenue growth in the medium term are key catalysts for stock performance. Factoring-in the flattish immediate revenue trajectory, we have pruned our FY24E/FY25E EBITDA by 21%/8% respectively. However, we believe revenue is likely to grow 2x in FY27E compared to FY24 levels. As a result, our revised target price works out to Rs1,325 (earlier: Rs1,175) on DCF methodology. Maintain BUY.

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