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Maintains its fiery growth outlook

Bharat Electronics faced execution issues in 4QFY22 due to ongoing Russia-Ukraine conflict and extension of semiconductor shortage, but a robust order inflow pipeline, gross margin improvement, increasing exports and scale up of new business segments paints a positive growth outlook over next 3 years. We met with senior management of Bharat Electronics to get an update on order pipeline and future growth outlook. Following are the key takeaways: a) a robust pipeline of INR250-300bn drives confidence of achieving INR200- 220bn inflows in FY23, with an upside possibility if trials in few large orders complete within stipulated time, b) targeting revenue growth of 15% in FY23 with margins in 21-23% range (vs 20-22% guidance earlier) through scale up in large orders (LRSAM, Akash, IACCS) and higher indigenisation, c) non-defence revenue from EVMs, smart cities, fibre optic and doubling of exports (from USD32mn to USD70mn) to result in faster growth in FY23 and d) capex intensity to sustain in INR5-6bn range, but approval of semiconductor fab PLI (consortium route) and electronics fuse order win can scale up total capex to INR20-25bn. We maintain BUY with revised TP of INR275, based on 20x FY24E EPS.

* Order pipeline of INR250-300bn with high degree of certainty: Given several large orders under finalisation stage, management highlighted that total quantum of orders to be booked in next 12 months stands at INR250-300bn. However, they guided for order inflows of INR200-220bn in FY23, being conservative, as some of these projects are undergoing trials and final negotiations are contingent on timely completion of trials.

* Targeting revenue growth of 15% in FY23: Shortage of semiconductors led to spillover of revenue of INR27bn in FY22, of which management expects INR9bn to be booked in 1QFY23, while the balance will be booked over next 2 quarters as the supply chain constraints ease out. However, more than 95% of FY23 forecasted revenue will be contributed from FY22-end order book and dependence on new orders is very minimal.

* Indigenisation of components to drive 200-300bps gross margin expansion: Despite raw material cost spike, management guided for slightly higher EBTIDA margins of 21-23% (vs 20-22% earlier) as it expects material content to reduce. The key contributors of gross margin increase will be increased indigenisation in projects like LRSAM and smart cities, scale benefits in EVMs and a better sales mix (doubling of exports).

* PLI wins in new business areas to drive revenue as well as capex increase: Management is estimating capex of INR5-6bn in existing business segments in FY23, while new business segments in civilian segment like semiconductor fab facility (through consortium route), EV batteries, medical electronics, smart cities and defence segment like electronic fuses may to increase capex intensity in INR20-25bn range.

* Maintain BUY with revised TP of INR275: We forecast sales and EPS CAGR of 16%/19% over FY22-24E led by a robust order pipeline, scale up in new businesses and increased indigenisation. Maintain BUY with revised TP of INR275, based on 20x FY24E EPS.

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