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Better-than-expected performance…

About the stock: Bharat Electronics (BEL) is a leading aerospace and defence electronics company. It primarily manufactures advance electronics products.

* Multi-product, multi-technology- diverse product range including radar, missile systems, electronic warfare & avionics, anti-submarine warfare, electro-optics, homeland security, civilian products, etc

* Focus to increase the non-defence share to ~20% over two to three years

Q4FY22 Results: BEL reported a better-than-expected performance.

* Revenue declined 8.4% YoY to | 6324.9 crore (I-direct estimate: | 6320.5 crore). FY22 revenues were at | 15313.7 crore, up 8.9% YoY

* EBITDA margin declined 374 bps YoY to 24.8%; better than estimate of 22.4%, mainly due to lower other cost. EBITDA declined 20.4% YoY to | 1567.8 crore (I-direct estimate: | 1417.9 crore)

* PAT declined 15.6% YoY to | 1141.8 crore; better than estimate of | 1003 crore, primarily due to better-than-expected margins

* BEL’s order book was at | 57570 crore as of March 2022 end

What should investors do? Overall, expected double digit revenue, order inflow growth, sustained margins and strong order book to ensure better performance.

* We remain long term positive and retain our BUY rating on the stock

Target Price and Valuation: We value BEL at | 290 i.e. 24x P/E on FY24E EPS.

Key triggers for future price performance:

* 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

* Strong order pipeline in FY23-24E

* We expect revenue, EBITDA to grow at a CAGR of ~16.8%, 14.4%, respectively, in FY22-FY24E aided by sustained margins in range of 20-22%

* Strong balance sheet, double digit returns ratios

Alternate Stock Idea: We also like Larsen & Toubro in our coverage.

* Focus on monetisation of non-core assets, enhancing RoEs and reducing debt make it an attractive bet to ride the infrastructure revival theme

* BUY with target price of | 1930

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