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Raises sales growth guidance on improve inflows

Bharat Electronics (BHE) reported a beat on numbers in 4QFY23. Net sales came in at INR64.6bn, up 2.1% YoY, while EBITDA was 16% higher vs JMFe (INR18.2bn; +16% YoY), as mix was better than expectations. Gross margins improved to 48.2% (+640bps YoY), driving EBITDA margin expansion of 350bps to 28.3% vs 24.8% in 4QFY22. Order inflows grew by 132% in 4QFY23, with cumulative inflows of INR203bn in FY23, thus meeting their guidance and raising order book to INR605bn (3.4x TTM sales, +5.1% YoY). For FY24, management guided for annual order inflow of INR200bn+ for FY24, flat YoY as it assumes large value orders like QRSAM, MRSAM and Triton EV battery packs is likely to spill over to FY25. Also, they guided for an accelerated sales growth of 17% with EBTIDA margins in 21- 23% range. We remain optimistic due to a host of factors such as a robust order pipeline over next 2-3 years, continued indigenisation push by Ministry of Defence and rising share of electronics in defence equipment, which is likely to drive revenue and PAT CAGR of 13% and 14% respectively over FY23-25E. Maintain BUY with TP of INR135, based on 25x FY25E EPS

* Decent order book execution during the year: Net sales largely remained flat at INR64.6bn (in line with JMFe) with improvement in semiconductor supplies and better order execution. Majority of the revenue was domestic, with INR3.9bn revenue contribution from exports (US$48mn). We expect sales growth of 13% CAGR to sustain over next 2-3 years, led by continued indigenisation drive, back ended execution in large projects like Akash Missile, LRSAM and ramp up of servicing income, exports and new businesses (EVs, metro rail).

* Favourable product mix supports margins: EBITDA grew by 16% YoY at INR18.2bn, 16% above JMFe, while EBITDA margins expanded by 350bps YoY to 28.3% largely on the back of higher gross margins (48.2%, +640bps) in comparison to previous year. Other operating expenses were higher due to higher provisions (INR3.4bn in FY23) and increase in traveling and other expenditure given increase in scale of operations. The company intends to maintain EBITDA margins in the range of 21-23% in FY24/FY25.

* Exceptional growth in order inflows: Order inflows surprised positively and grew by 132% YoY to INR 167bn in 4Q, as large orders were booked before 4QFY23-end. Cumulative inflows stood at INR202bn in FY23 vs annual guidance of INR180-200bn, and management further guided for order inflows of INR200bn+ in FY24, including orders like Akash Prime, electronic fuse, EWS, radars, electronics for naval ships, etc. Its pertinent to note that several large orders like MRSAM, QRSAM and Triton EV battery packs is not factored in the guidance.

* Maintain BUY with revised TP of INR135: Management increased its revenue growth guidance to 17%+ for FY24 and similar for FY25, as several large orders are approaching final stages. EBITDA margins are expected to sustain at current levels (21-23%). We bake in INR210bn inflows in FY24, growth of 4% YoY. We maintain BUY with revised TP of INR135 (25x FY25E EPS), as we forecast sales/EPS CAGR of 13%/14% over FY23-25E. Key risk is sharp cut in defence capex by government.

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