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Impressive execution; order inflows to pick up

Bharat Electronics (BEL) has reported an impressive Q1FY23 earnings, and has started FY23 on a strong note. Gross margin (ex other operating income) had bottomed out in Q3FY22 and since then charted a recovering trend. The same has been offset by an increase in fixed costs (employee and others) leading to a decline in EBITDA margin. Likely, execution will pick up to restore the EBITDA margin trajectory, as underlined in management guidance. Order inflows were muted in Q1FY23, but given the underlying trend in defence spending and the projects in the pipeline to be ordered, we do not see risks for BEL garnering ~Rs1,100bn of defence orders over the next 5 years. Further, the company remains committed to increase the non-defence revenue from 12% (at present) to 20% in the medium term. We maintain BUY – BEL remains one of our top picks along with HAL.

Visibility of 15-17% revenue growth over FY23/24E.

Key projects to be executed over FY23E are Akash missile system, LRSAM - both the projects will see similar execution as in FY22E or ~Rs25-30bn each. IACCS execution would come down in FY23E as project nears completion. Other key projects under executing are naval sonar and communication system and emergency procurement systems (orders received in July–Aug’21; will be supplied in FY23E). Ground-based EW and airport based EW are also slated for delivery in FY23. Combined, these projects are expected to contribute Rs120-130bn of revenue. Also, additional Rs13bn will come from EVM VVPAT. Revenue to face risks due to chip shortages as suppliers have been highlighting a delay of 3-4 months. Israeli partner to DRDO for LRSAM project faced delays in supplying important parts for LRSAM due to the same. Management expects revenue slippages of Rs3bn in the LRSAM project. Also, other projects like Chennai (electro-optics project) and Machalipatnam will see an impact on account of chip shortages.

Order visibility of Rs150-170bn p.a. over FY23/24E and a potential (meaningful) pickup in order flow post that.

BEL achieved ~Rs8.3bn of order inflow in Q1FY23, with ~Rs4.5bn on account of WLR for army. Further, possible order inflows in FY23E include: i) Himshakti programme worth Rs33bn, ii) Atulya Air Defence fire control radar of Rs20-30bn, iii) different kinds of EW procurement of Rs30-40bn, iv) BMP upgrade of Rs40bn etc. Big-ticket order expectations are QRSAM (Rs300-400bn; BUY Global programme of Indian army for the same has been scrapped and will bring forward indigenous acquisition of the same, still can take two years+) and MRSAM (Rs200bn).

We do see prospects of exports ramping up as well for BEL

Export revenue nearly doubled YoY for BEL in FY22. Large export orders were booked from Airbus, as a follow-through of C295 transport aircraft orders from IAF (to Tata Airbus consortium). We also see a significant possibility for BEL as HAL emerges as the top contender for many global airforce tenders

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