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Indigenisation drive to catapult growth for domestic players

Bharat Electronics (BHE) reported its provisional results for FY22, reporting 8.5% sales growth for FY22 and 9% YoY decline for 4QFY22. This was a tad lower than its guidance of 10-12% growth for full year, due to shortage of semi-conductors, March month being lumpy in revenue booking and facing a severe crunch. However, release of large value orders by MoD led to healthy order inflow growth of 20% YoY to INR183bn (1.2x TTM sales) for FY22, with avionics and electronic warfare contributing the larger value. Also, in pursuit of self-reliance in defence manufacturing, GoI unveiled list of 107 strategically important Line replacement Units (LRUs)/sub-systems with a definite timeline. Given this positive development we expect Bharat Electronics (BHE) to be a key beneficiary. We expect sales growth to accelerate given a) robust order book of INR 570bn (3.8x TTM sales), b) import ban on high value equipment as well as subcomponents, c) opportunities in automobile electronic segment for manufacture of lithium ion batteries and cells, d) diversification in new business segments energy storage, solar cells, space electronics, unmanned systems, etc. and e) focus on export of defence equipment, specifically platforms like missiles and communication systems. We continue to maintain BUY with a TP of INR270, valuing the stock at 20x FY24E EPS

Slowdown in 4Q led to revenue miss- Bharat Electronics (BHE) reported FY22 provisional numbers. Net sales (FY22: INR 150 bn, +8.5% YoY) were 4% below JMFe given slowdown in project execution in Jan’22 likely on the back of 3rd Covid wave impacting operations. In 4Q22, revenue came at INR 61.5 bn (-9% YoY) lower by 10% vs JMFe

Healthy order book and improving inflows provide comfort: Order Inflows surprised positively and reported growth of 17.2% YoY at INR 63.3 bn. OI in FY22 came in at INR 183 bn (JMFe: INR176 bn)( (1.2x TTM sales), taking up to order book to INR570bn (3.8x TTM sales), while the order pipeline indicates that annual inflows may range in INR150- 180bn per annum over next 2 years. Major orders acquired were Avionics Pack for Light Combat Aircraft (LCA), Advanced Electronic Warfare Suite for Fighter Aircraft, Instrumented Electronic Warfare Range (IEWR), etc.

Expanding import embargo list to provide more clarity: Recent list provided granular details on sub-components by elicit immediate action by industry participants. The current list is curated after consultation with industry participants and will improve self reliance under as these projects are taken up by DPSUs under Make category. The earlier 2 lists had contained only platforms/systems and lacked clarity on sub-components/subassemblies. This along with other measure like increase in FDI limit to 74% under automatic route and corporatisation of OFBs, this will give the necessary fillip to domestic defence manufacturers.

Maintain BUY with a TP of INR270: We forecast sales and EPS CAGR of 16%/19% over FY22-24E, led by better than expected order inflows, faster indigenisation of defence subcomponents, diversification in new business areas and back ended execution profile. We maintain BUY with a TP of INR270, based on 20x Mar’24E EPS

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