IGI Logo

Diversification remains integral to strong guidance

Bharat Electronics’ (BEL) management highlighted i) potential order inflow of Rs 150-170bn p.a ii) potential revenue growth of 15% p.a in the medium term iii) continuing with its current diversification effort towards rail/metro, smart city projects, home land security etc and iv) service revenues to contribute 25% of revenues in the next few years. We downgrade BEL to HOLD from BUY given ~67% increase in stock price over the past 6 months.

* Guidance on margins and orderbook. BEL has ~Rs550bn of order book which will sustain revenue growth for the coming 3-4yrs at ~15%p.a. BEL is targeting ~20~22% EBITDA margins for the next 2-3 yrs. Management expects continuing order inflow at Rs150-170bn p.a. Apart from defence (forming ~80% of current revenues), BEL sees significant opportunity in its current diversification efforts towards rail/metro, smart city projects, home land security etc. Management also highlighted the AMC/ROH revenues to contribute ~25% of topline in the next few years. Despite nominated orders forming ~75% of the current orderbook, management is confident that the margins can be maintained. With increase in revenues, employee cost will moderate towards ~12% of revenues. There was a one-time royalty payment for ToT of ventilators in FY21 (~ Rs1.6bn)

* On new businesses and their potential revenue contribution. Ammunition business is expected to contribute revenues of > Rs5bn p.a. Management also expects the ammunition fuse business revenues at ~Rs1-1.5bn p.a. BEL has competed successfully in a global contract for 105mm/155mm fuses. BEL has also participated in a recent RFP for fuses (shortly going under user trials) - a 10 years contract @ 0.5mn fuses p.a. Along with this, BEL also participated in 30mm & 40mm fuses contracts. BEL is also going for the development of shells (got orders for guided bombs, air drop bombs etc.). In the segment of medical electronics, BEL is trying to get into working arrangements with the aggregators (buyers from OEMs and suppliers to various hospitals).

* Software as a service (SaaS) to become Rs50bn vertical over next 3 years. BEL has been receiving orders ~Rs500mn-1bn p.a. in the SaaS vertical. Management expects SaaS to be Rs50bn SBU in the coming 3yrs, given requirements from the Government as well as other civilian entities.

* Capex of Rs18bn over next three years (FY22-24E). Key capex projects include ~Rs4bn for the first phase of Defence Sytem Integration Complex at Palasamudram plant, Rs2bn for Ibrahimpatnam plant (land based EW system), Rs2bn for the artillery fuse manufacturing facility in Nagpur and Rs3bn for Nimmaluru plant at Machilipatnam for IR Seekers, advanced Night vision devices (NVD) and electro optics. NVD and electro-optics plant is expected to commission by Aug, ’22. Nagpur plot registration has recently concluded [Solar Industries (SOIL) does the filling for the BEL’s fuse plant in Pune]. DSIC plant at Palasamudram is expected to be complete over the next 2-3 years.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer