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Buy Bharat Electronics Ltd For Target Rs.280 

Strong order book; healthy balance sheet

We hosted Mr Dinesh Kumar Batra (Director Finance), Damodar Bhattad (GM, Finance) and Mr Sabhari V (Sr DGM). Bharat Electronics (BHE) is a principal supplier of many electronic products like radars, naval systems, EWS, avionics, weapon systems, etc. to all the 3 armed forces. In order to reduce its dependence on defence sector, BHE has diversified into medical electronics, energy storage, unmanned system, space electronics and systems, SAAS, ammunition, metro rail, etc. in FY22, non?defence segment contributed ~12% of revenues and is expected to contribute ~25?30% of its revenues by FY24E.  

We believe Govt.’s thrust on defence spending and growing opportunities in exports and non?defence markets would augur well for BHE. We expect ordering activity to remain robust in all three defence segments over the next 3?5 years. At CMP, the stock trades at a PE of 20.5x/16.6x on FY23E/FY24E EPS. We maintain our BUY rating on the stock with a revised TP of Rs280 (previously Rs260) valuing the company at a PE of 20x on FY24E EPS.

Key Highlights:  

* Management had a robust outlook on the potential opportunities owing to government's thrust on indigenization and the company expects to be a prime beneficiary of the same given its level of expertise, technical abilities and successful track record of execution

* Despite facing challenges in the form of semiconductor supply, the company managed to post record operational performance in the form of highest ever revenue, EBITDA and PAT in FY22 at ~Rs153bn, Rs33bn and Rs23bn respectively.

* Owing to supply chain issues, Rs27bn worth of revenue could not be booked in FY22. Out of this, the company expects Rs9bn to be recognized in 1QFY23E

* Order inflows during FY22 came in at Rs194.5bn, taking the order book to a record high of Rs575.7bn, providing strong revenue visibility over the coming few years. ~91?92% of the order book is on nomination basis from the government and the rest is through bidding process

* Key order wins in FY22 were a) Rs40bn for Akash Prime from BDL (deliverable over 3?4 years), b) Himshakti EWS worth Rs30bn, c) upgrade of EWS MI17 for Rs16bn, d) Medium power radar Rudra for Rs 30bn, e) fire control system worth Rs14bn, f) GSL worth Rs20bn

* The company expects revenue growth of 15% in the near to medium term and has given a capex guidance of ~Rs300?400bn for the coming few years

* Ministry of Defence (MoD) had floated a tender for artillery fuses which had witnessed a lot of participation from private players. After several rounds, only two companies are in the fray out of which BHE is one. Management is very hopeful of winning the tender which has a potential of Rs50bn over 10 years

* Due to the MoD's 3 positive lists of ~310 products which seek to progressively ban the imports of certain products, platforms, systems, etc, the company expects the opportunity size for domestic players to be in the region of Rs2trn out of which BHE has a visibility of Rs500bn. However, it expects a lot of private players to participate but is confident of competing with them

* In order to diversify away from defence business, the company is targeting sectors such as civil aviation, e?mobility, metro rail, etc. It also intends to penetrate emerging markets for both defence and non?defence business to improve the share of exports.

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