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Order inflow and execution continue to impress

Bharat Electronics’ (BEL) continues to impress with a 9% YoY topline growth and 150bps YoY standalone EBITDA margin expansion for FY21 – a year with a near lost Q1FY21 (revenues declined 20% YoY in Q1FY21) on account of the pandemic. There has been a working capital release of Rs 23bn for FY21, driven by Rs 28bn of H2FY21 working capital release – another remarkable statistic. To add to the achievements, order acquired has been Rs 152bn (~Rs54bn for Q4FY21), thereby maintaining a healthy book to bill of 3.9x on FY21E (standalone) topline of ~ Rs140bn. BEL’s performance continues to stand out (execution + margin + orderbook visibility) within listed DPSU space. We continue to maintain BUY with a revised target of Rs177 (Rs153 earlier)

FY21 order inflow at Rs152bn.

The FY22 order pipeline is also quite visible with ~Rs125bn of missile orders to BDL and Rs380bn of LCA Mk1A orders to HAL. Q4FY21 witnessed Rs10bn of order inflow from Software defined radio (tactical) for Indian navy. The opportunity from SDR is also significant with BEL already supplying SDR (Naval combat) version and SDR-Air being under evaluation.

Near-term order opportunities.

BEL has already accounted for execution of avionics related to LCA Mk 2 as HAL has received LoI for the same. Key elements of the avionics package for LCA Mk 2 include Fly by Wire Digital Flight Control Computer (DFCC). Future opportunities include Jammer for LCA. Also, LUH and LCH (helicopters) may allow sensors (MAWS and counter-measure dispensers along with HMDS) and weapons to significantly augment BEL’s avionics revenue.

Onus will be on diversification and execution. BEL targets:

i) civilian segment (including medical equipments) to increase from 7% of topline to 15% in the next 2- 3 years; ii) to increase the current 10% revenue contribution from service sector (including AMCs); iii) capture a pie of the revenue expenditure budget of the Armed Forces via entry into electronic fuses and RF seekers (new complex in Machilipatnam to be commissioned soon); and iv) gain share in the base business, i.e. integration of missile complex (Palasamudram; another separate SBU for QRSAM in Bengaluru), entry into ammunitions, etc. Diversification away from the base business (Indian defence) is key to achieve medium-term visibility on double-digit revenue growth.

Maintain BUY.

We value BEL at 17x FY23E earnings (vs 15x FY22E earlier). We maintain BUY with a revised target price of Rs177/share. BEL continues to surprise on execution, margins, order inflow, growth despite reaching a commendable scale (compared to Indian defence budget) – FY21 performance highlights the strength of underline business model.

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