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Strong execution continues

Bharat Electronics (BHE) reported in line revenue while EBITDA and PAT came in ahead of estimates due to better margins. Net sales (INR35.1bn; 13% YoY) were in line with JMFe, while EBITDA (INR6.6bn; +29% YoY) was 9% higher vs JMFe. Gross margins improved to 43.5% (+160bps YoY) leading to strong growth in EBITDA margins by 240bps to 18.9% vs 16.5% in 1QFY23. Net profit came in at INR5.3bn (+23% YoY) ahead of our estimate of INR 4.5bn and consensus estimate of INR 3.5bn. Order backlog was up 18.1% YoY to INR654bn (3.6x TTM sales) led by robust order intake of INR 83bn in 1Q. For FY24, management guided for annual order inflow of INR200bn+, flat YoY as it assumes large value orders like QRSAM and MRSAM are likely to spill over to FY25. BHE reiterated 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. We estimate revenue and PAT CAGR of 17% and 18% respectively over FY23-25E. We transfer coverage to Ashish Shah. Maintain BUY with revised TP of INR145, based on 25x FY25E EPS.

* Order execution remain strong:

Net sales were up 13% YoY to INR35.1bn given improvement in semiconductor supplies and better order execution. Majority of the revenue was domestic, with INR34bn revenue contribution and from exports stood at INR870mn. 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 29% YoY at INR6.6bn, 9% above JMFe, while EBITDA margins expanded by 240bps YoY to 18.9% largely on the back of higher gross margins and better management of operational expenses. Employee expenses were higher due to D.A and contract labour. Other expenses did not have any provisions for LDs etc but BHE did not rule out such provisions going forward. Overall, BHE intends to maintain EBITDA margins in the range of 21-23% in FY24/FY25.

* Healthy order inflows in 1QFY24:

Order inflows surprised positively and grew to INR 83bn in 1Q24, as large orders were booked during the quarter. Cumulative inflows stood at INR83bn in 1QFY24 vs annual guidance of INR200bn+, and expect major order of INR60- 70bn in remaining 9M a) electronic warfare INR10bn b) naval vessel equipment INR60bn and c) remaining other small orders. Orders on nomination based would be 90% and 90% of the backlog is for products with 10% for services.

* Maintain BUY with revised TP of INR145:

Management maintained 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 INR145 (25x FY25E EPS), as we forecast sales/EPS CAGR of 17%/18% over FY23-25E. Key risk is sharp cut in defence capex by government or delay in conversion of the expected bid pipeline.

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