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Strong execution, outlook robust with a healthy order book

EBITDA margin beat driven by lower employee cost and other expenses

* BHE’s 4QFY21 earnings were 39% above our estimate, with the surprise entirely led by higher than expected EBITDA margin (28.5% v/s our estimate of 21.3%). The EBITDA margin expansion was largely attributable to lower employee costs (-17% YoY), other expenses (-10% YoY) and higher domestic outsourcing by BHE.

* Margin depends on the sales mix between deliverables and hence tends to be volatile on a quarterly basis. BHE’s current order book is strong at INR534b, with an OB/revenue ratio of 3.9x. The company raised its margin guidance to 21-22% from 18-19% in FY22.

* BHE ended FY21 with a 9%/17%/15% increase in revenue/EBITDA/PAT, which is commendable given the COVID-led disruptions. We increase our FY22E/FY23E EPS by 17%/14%, led by higher EBITDA, due to a revised margin guidance. Our revised TP stands at INR195/share (18x FY23E EPS). Maintain Buy.

Margin led earnings beat

* 4QFY21 snapshot: Revenue grew 19% YoY to INR69b and was 7% ahead of our estimate. Gross profit grew 14% YoY as gross margin contracted by 180bp to 41.1%. EBITDA grew 33% YoY to INR19.7b and was 43% ahead of our expectation. EBITDA margin came in at 28.5% v/s our estimate of 21.3%. Adjusted PAT grew 31% YoY to INR13.5b and was 39% ahead of our estimate.

Highlights from the management commentary

* BHE is aiming at 15-17% revenue growth in FY22, with a revised EBITDA margin guidance of 21-22% (upward revision in guidance).

* Based on projects in the pipeline as well as upcoming project visibility, it expects INR150-170b of order inflows in FY22.

* Inventory levels are slightly elevated owing to the expedition of deliverables. BHE has collected the highest ever receivables of INR180b in FY21.

* The management aims to grow the non-Defense (Civil) part of the business, via categories like: a) medical equipment, b) metro projects, c) EV batteries, d) space systems, e) aerospace (sensors etc.), and f) smart city projects.

* It is aiming at an export growth of over 15% (over USD60m) in FY22. The company has opened many marketing offices overseas and is participating in tenders as and when they come. The current order book stood at INR12b, with an aim to add orders worth USD100m in FY22.

Valuation and view

* We forecast revenue/EBITDA/PAT CAGR of 11%/9%/11% over FY21-24E. We have built in a sufficient margin cushion as we assume an EBITDA margin of 21.7%/21.2% by FY22E/FY23E (v/s 22.6% reported in FY21). Our revised TP stands at INR195/share (18x FY23E EPS). At the CMP, the stock trades at 17x/16x FY22E/FY23E P/E, despite having an RoE/RoCE of ~19%/20%, dividend yield of ~3%, and FCF yield of 2-4%. Maintain Buy. Higher growth in the non-Defense business poses an upside risk to our EPS estimates, while working capital deterioration poses a key downside risk to valuations.

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