Add Bharat Electronics Ltd For Target Rs.106 - Yes Securities
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Mixed bag; order inflow the key monitorable
Our view
Bharat Electronics Ltd (BHE) reported a mixed set of numbers with revenue slightly missing our estimates. Even though input cost pressures have eased, gross margins saw a sequential contraction of ~175bps. This, coupled with negative operating leverage led to a ~160/100bps YoY/QoQ 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 74% YoY taking its order book to ~Rs501bn (2.9x TTM revenue), providing revenue visibility for next few years. Despite muted YTD order inflows, 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 24.3x/19.7x/17.6x FY23E/24E/25E. Given the company being the prime beneficiary of the government’s thrust on defence and focus on diversifying its revenue, we maintain our ADD rating. We roll forward our target multiple to FY25E with a TP of Rs106 valuing the company at a PE of 20x on FY25E EPS.
Result Highlights
* Sales grew 12% YoY to Rs41.3bn, slightly below YSL estimate of ~Rs42.1bn led by strong execution ? Gross margin expanded by ~110bps YoY to 41.5% in 3QFY23 while on a QoQ basis there was a contraction of ~175bps
* EBITDA came in at Rs8.5bn (YSL estimate Rs9.2bn) with EBITDA margins coming in at 20.7% vs 22.3% in 3QFY22. On a QoQ basis as well, margins contracted by ~100bps largely due to weak gross margins
* PAT came in at Rs6bn vs YSL estimate of Rs6.5bn
* Order inflows came in at ~Rs14.5bn taking its order book to ~Rs501.2bn (2.9x TTM revenues)
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