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Strong performance on all fronts…

Bharat Electronics (BEL) reported revenues at | 6908 crore, growth of 19% YoY (vs. I-direct estimate of | 6485 crore), on the back of normalising supply chain and execution business operations. For FY21, revenue came in at | 14063.8 crore up 8.8%, YoY. Absolute EBITDA for the quarter came in at | 1970.6 crore (vs. our estimate of | 1529.8 crore), up 32.9% YoY. EBITDA margin came in better than estimated at 28.5% (above our estimate of 23.6%) improving ~300 bps YoY, owing to reduced other operating expenses and employee expenses. Consequently, PAT came in at | 1352.4 crore, up 30.7% primarily due to higher execution, improved margins. Also, other income was up 102% to | 57 crore, YoY.

Strong order pipeline, execution pick-up to drive growth...

For Q4FY21, BEL bagged strong orders worth ~| 5400 crore while order inflows for FY21 came in robust at | 15280 crore (vs. | 13200 crore in FY21). Order book as on FY21 was robust at | 53434 crore (vs. | 54791 crore in Q3FY21). BEL is aiming at order inflows of ~ | 16000–17000 crore for FY22E. It expects orders in electronic warfare systems, Akash weapon system, avionics package for LCA, smart city business and other non-defence businesses, etc, in the medium term.

Future opportunities include Jammer for LCA, QSRAM, etc. Also, LUH and LCH (helicopters) may allow BEL sensors (e.g. counter-measure dispensers) and weapons to significantly augment BEL’s avionics revenue in the long term. Going ahead, a further pick-up in execution and a favourable product mix would help BEL stabilise base EBITDA margins in the ~20-22% range. BEL aims to diversify into nondefence areas that now contribute ~10% of order book and ~7% of revenues as of now. The revenue contribution is expected to increase to 20- 25% over the next two to three years. BEL being a zero debt company is able to maintain its working capital without external borrowings.

Valuation & Outlook

Overall, BEL’s strong execution in FY21 is expected to keep the momentum going in coming years despite short term challenges. Overall, expected double digit revenue growth, sustainable margins, better order inflows and strong order book of | 53434 crore suggests strong performance in the long term.

Also, strategy to diversify into non-defence areas, focus on increasing exports and services share would aid long term growth and help de-risk its business model. We expect BEL to report revenue, EBITDA, PAT CAGR of 13.9%, 10.3%, 13.0%, respectively, in FY21-23E. We revise our target price to | 205, 19x on FY23E EPS (earlier TP | 170) and reiterate BUY.

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