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Guidance remains intact, inflow trajectory to improve

Bharat Electronics (BHE) 1QFY23 results beat expectations. Net sales was above JMFe and consensus estimate (INR31.1bn; +90.4% YoY), as easing of semiconductor shortage led to booking of spill over revenue of INR8.2bn from FY22. EBITDA was 65% above JMFe (INR5.1bn; +717% YoY), as EBITDA margins expanded by 1,260bps YoY to 16.5% (JMFe: 13.3%). Management reiterated its guidance of maintaining 15% revenue growth with EBITDA margins in 21-23% range in FY23. Order inflows took a hit reporting decline of 68% to INR 8.2bn, while order book was up 1.5% YoY to INR553bn (3.3x TTM sales). On 3-year CAGR basis, sales/EBITDA/PAT reported growth of 14%/14%/28% respectively

BHE remains our top pick on continued indigenisation in defence and increasing share of electronics in all large platforms as: a) positive surprise in growth due to expansion in civilian segment (railways, medical electronics, batteries and smart cities), exports (export inflows to more than double to $400mn) and service income (AMC for Russian equipment), b) margin expansion in last 5 years (despite Pay Commission implementation, margin cap on nominated orders and high share of outsourcing), and c) improved financial strength as NWC turned negative (22days to -24 days) and robust RoICs (42% in FY22 vs avg of 31% in past). We revise our TP to INR315, as we roll forward by 6-months, valuing stock at 20x Sep’24E EPS.

* Better execution drives performance: Net sales increased by 90.4% YoY to INR31.1bn, as ease in semiconductor and chip shortage improved sales in 1QFY23. Management highlighted that spill over revenue of INR26bn from FY22 will be fully executed in FY23, booking revenue of INR8.2bn in 1Q, INR5bn in 2Q and rest in 3Q&4Q. We expect sales to grow at 15% CAGR over FY22-25E, given increased inflows with the indigenisation drive, back ended execution in large projects like Akash Missile, LRSAM and ramp up of servicing income, exports and new businesses (metro rail, batteries, etc)

* Higher indigenisation to further improve margins: EBITDA improved to INR5.1bn, while EBITDA margins expanded by 1,260bps YoY to 16.5%, largely due to better absorption of fixed expenses, while gross margins sustained at 41.9% on the back of better product mix. Management intends to maintain higher margins of 21-23% in FY23 with increased indigenous content. Other income increased to INR1.6bn due to one time special dividend of INR780mn from GE BEL (26% stake). Net profit improved to INR4.3bn.

* Inflows trajectory intact; balance sheet continues to remain strong: Order inflows were down 68% in 1Q to INR8.2bn, due to lumpy nature of orders and are likely to reach INR180-200bn for FY23. We expect large orders like Akash missile, Himshakti EW system, Arudhra Radar and ship-borne systems to drive inflows. Order book stood at INR553bn (3.3x TTM sales), up 2% YoY. Capex guidance stood at INR10bn for FY23.

* Maintain BUY with a revise TP of INR315: We continue to maintain positive view on BHE given its improving order book, margin resilience and a robust balance sheet position with 5-year high RoIC of 42%. We maintain BUY with revised TP of INR315 (20x FY25E EPS), as we forecast sales/EPS CAGR of 15%/21% over FY22-25E. Key risk to our call is sharp cut in defence capex by government.

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