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Order inflows to pick-ups…

Bharat Electronics Ltd. (BEL) is a Navaratna enterprise with 37% market share in Indian defence electronics. BEL’s core capabilities are in radar & weapons systems, defence communication, & electronic warfare.

* 9MFY23 revenue grew by 25% YoY, PAT was up by 36% YoY, led by better execution.

* 9MFY23 EBITDA margin improved by 50bps YoY to 20.0%, and absolute EBITDA grew by 28% YoY.

* The order backlog at the end of Q3FY23 was at Rs.50,116cr (3.3x FY22 sales), providing strong earning visibility for the next 3 years.

* The order book is boosted by ~Rs.16,000cr worth of orders towards the end of the year, bringing the total order backlog to Rs.66,410cr (4.4x FY22 sales). The cumulative order intake for the year was Rs.19,800cr.

* We maintain our positive view in the long term, considering strong order book visibility, execution prowess, and a stable margin profile ~22%. While PAT continues to grow at a 16% CAGR over FY23E-25E.

* We value BEL at a P/E of 21x on FY25E, and given recent order wins, upgrade to Buy from Hold rating with a target price of Rs.112.

Order backlog to boosted by Rs.16,000cr worth orders..

9MFY23 order inflow was down 70% YoY at Rs.3,551cr, which was lower than expected due to delays in approvals. However, last week BEL booked Rs.1,294cr worth of orders bringing the total order backlog to Rs.66,410cr (4.4x FY22 sales). Major orders won by the Army include the EW suite, AMC Akash, WLRs, automated air defence control, instant fire detection & supressing systems. The Navy’s order includes SDRs, communication equipment, Sarang, etc. Supply of medium power radar and digital radar warning receiver (RWR) for Indian Air Force, worth, Rs.3800cr. With these order inflows, BEL is expected to meet the order inflow guidance for FY23E of Rs.20,000cr. BEL is diversifying into non-defence sectors such as healthcare, smart city projects, airports and vehicle charging infra. Management’s long-term plan is to increase its non-defence business from 10% to ~25% of total sales.

Execution healthy...

9MFY23 revenue was up by 25% YoY, driven by strong execution, while Q2FY23 revenue grew by 12% YoY, in-line with our expectations given the higher base. Going ahead, we expect execution to remain healthy due to the given execution timeline. We expect revenue to grow at a 14% CAGR over FY23E-25E.

EBITDA margin to improve

EBITDA margin in Q2FY23 was down by 176bps YoY at 20.7% on account of higher costs. Consequently, PAT was flat on a YoY basis. We anticipate that EBITDA margin will be in the range of ~22-22.5% in FY24-25E, owing to higher indigenous content and scale benefits. We expect earnings to grow at a 16% CAGR over FY23E-25E.

Valuations

We maintain our long-term positive stance on BEL on account of the government’s focus on reducing imports, the rising share of electronics in defence, and its execution capability. We value BEL at a P/E of 21x on FY25E, given recent order wins, upgrade to Buy from Hold rating, with a target price of Rs.112.

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