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Indigenisation drive provides long term growth visibility

We attended Bharat Electronics analyst meet and the key takeaways are a) Government push on indigenisation to create additional opportunities for the company and the defence space as a whole (c.INR2trn opportunity over last 3 indigenisation lists), b) revenue CAGR of 15% with expected order inflows of INR200 bn per annum over 3 years, c) 100-200 bps improvement in EBITDA margins given increased localisation (target to reduce imports from 35% of total RM to 15-20%) d) Order pipeline stands strong at INR500bn+, consisting of LRSAM (new variant), Akash Missile (for Army and NG variant), MRSAM, QRSAM, naval equipment and EW systems, e) management intends to increase share of civilian segment to 25% of sales and increase share of servicing income from 10-12% to 20% of sales in next 5 years, and f) exports to double in FY23 and increase given strong US$450bn order pipeline and US$270mn order book vs FY22 revenue of just US$33mn, led by new country offices. Capex is likely to be INR 7.5 bn in FY23, with cumulative capex of INR23bn in next 3-4 years. Management highlighted that budget constraints can lead to spreading out of orders by armed forces, even as pipeline remains strong. However, we believe improving inflows and prudent working capital management is likely to further strengthen balance sheet. We maintain BUY with revised TP of INR350, based on 23x Sep’24E EPS (50% premium to 10- year median multiple).

* Indigenisation drive to catapult growth over next 5-6 years: Management highlighted with 3rd indigenisation list publsihed by MoD, total opportunity size has increased to c.INR2trn in 5-6 years. Further, company maintained its FY23 revenue growth guidance of 15% to INR175bn and 12-15% CAGR over next 3 years, led by execution in large projects – LRSAM, Akash Missiles and IACCs and EVMs. This will be supported by order inflows of INR200bn in FY23, which should result in year ending order backlog position of INR600bn. Also, the company reiterated its EBITDA margin guidance in 21-23% range, but indicated that it will be closer to the upper end of this range. The company is looking to step up supplies in non-defence areas and exports materially in FY23.

* Target to increase contribution from non-defence segments: Management highlighted that company intends to increase revenue contribution to 25% in next 2-3 years from non-defence space. Major contribution to the revenue in the space would be from homeland security and smart city segments, followed by rail and metro segment (for train management system) and Airport Authority of India (for air traffic management system).

* Robust order pipeline over next 3 years: While the active order pipeline stands at INR500bn+, including surface-to-air missiles (new-LRSAM, QRSAM, MRSAM, Akash), naval equipment (NGMV, OPVs) and EW systems/radars (ground and airborne), mgt gave annual inflow guidance of INR200bn, as they may be spread out over multiple years.

* Maintain BUY with revised TP of INR350: We maintain positive view on BHE given its robust order book, margin resilience and a strong balance sheet position with 5-year high RoIC of 42%. Maintain BUY with revised TP of INR350 (23x Sep’24E EPS), as we forecast sales/EPS CAGR of 15%/19% over FY22-25E.

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