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Guided missile systems to drive orderbook and profitability

BDL reported a significant improvement in the reported print, with H1FY22 revenues up 142% YoY (still down 43.5% from H1FY20). Working capital witnessed a build-up of Rs3bn, which impacted the FCF in H1FY22. Currently, it is the key domestic supplier of SAMs and ATGMs to the Indian Armed Forces. While July’21 orderbook stands at Rs87bn (2.6x book to bill), management has reiterated the possibility of orderbook expanding to Rs230bn over next two years. We believe large part of the accretion is expected from Akash 3rd and 4th squadrons (Indian Army) and ‘Astra beyond visual range' (air-to-air missiles). Also, we believe BDL has the potential to benefit from India’s focus on defence exports. We maintain BUY with DCF-based target price of Rs600/share. Key risks include delay in execution, higher LDs accruing because of the same, lower-than-expected orderbook accretion, and higher material costs.

* Catering to the strategic needs of the country. A successful launch of the surface to surface Ballistic Missile, Agni-5, was carried out on 27th Oct, 2021 APJ Abdul Kalam Island, Odisha as per MoD. The missile uses a three-stage solid fuelled engine (it was first tested in 2012). With its 5,000 km range, the missile comes into the category of an intercontinental ballistic missile. We believe that the induction of nuclear strategic Agni missile would have revenue and orderbook implications for BDL (being the production partner with DRDO). Similarly, a new version of Akash missile, Akash Prime was successfully flight tested from integrated test range (ITR) in Chandipur, Odisha. The missile intercepted and destroyed an unmanned aerial target mimicking enemy aircrafts. In comparison to the existing Akash system, Akash prime is equipped with indigenous active radio frequency seeker. DRDO has also successfully flight tested indigenously developed, fire and forget man portable antitank guided missile (MPATGM) in Q2FY22. These are all potential order possibilities for BDL in our view.

* Orderbook has potential to reach Rs230bn in next two years. We believe this is the single biggest investment thesis for BDL and can potentially increase the book to bill ratio 5x by FY23E. The biggest component of the orderbook as expected are Akash 3rd and 4th regiment orders for the Indian Army and ‘Astra beyond visual range air-to-air missiles’ (both these projects combined will lead to accrual of Rs130bn in order inflow in the medium term). The expected execution on these missiles is also 2-3 years, which, we believe, allows for a much more constructive stance on possible medium-term revenues. VSHORAD and Smart anti-airfield weapon orders are expected in FY22E. ATGM orders will also be spread across FY22E and FY23E.

* BDL can play leading role in achieving Indian defence export target of Rs350bn by CY25. Akash weapon system has been cleared for exports by the Ministry of Defence (MoD). BDL and MBDA signed license agreement to setup facility at BDL for final assembly, integration and test of advanced short range air to air missiles (ASRAAM).

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