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Robust outlook; upgrade to ADD

Our view

Bharat Electronics Ltd (BHE) reported a strong set of numbers which was above our estimates, led by healthy execution across its order book. Even though input cost pressures have eased, gross margins contracted by ~20bps YoY. This, coupled with negative operating leverage led to a ~170bps YoY contraction in EBITDA margins. Ordering pipeline remains robust across segments such as electronic warfare system, army equipment like Akash weapon system, QRSAM, LRSAM, MRSAM and naval equipment like surveillance system, radars, navigation system, etc along with healthy traction in non?defence segments such as metros, railways, civil, ATS e?mobility, etc. Order inflows de?grew by 63% YoY taking its order book to ~Rs528bn (3.1x TTM revenue), providing revenue visibility for next few years. Management maintained FY23 order inflow guidance at ~Rs200bn and revenue growth guidance of 15%.

Given strong tender pipeline, comfortable order book, healthy execution capabilities and diversification into newer business verticals we expect BHE to report 14%/18% revenue/PAT CAGR over FY22?25E. At CMP, the stock trades at 27.9x/22.6x/20.2x FY23E/24E/25E. Given the strong performance witnessed in 1HYF23, the company being the prime beneficiary of the government’s thrust on defence and focus on diversifying its revenue, we upgrade it to ADD (from NEUTRAL) with a TP of Rs118 valuing the company at a PE of 25x on FY24E EPS.

Result Highlights

* Sales grew 8% YoY to Rs39.4bn, above YSL estimate of ~Rs38.3bn led by strong execution

* Gross margin contracted ~20bps YoY to 43.3% in 2QFY23 even though RM inflation has softened in recent quarters

* EBITDA came in at Rs8.5bn (YSL estimate Rs7.8bn) with EBITDA margins coming in at 21.7% vs 23.4% in 2QFY22. However, on a QoQ basis, margins expanded ~520bps

* PAT came in at Rs6.1bn vs YSL estimate of Rs5.5bn ? Order inflows came in at ~Rs14.1bn taking its order book to ~Rs527.9bn (3.1x TTM revenues)

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