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Robust execution; downgrade to NEUTRAL

Our view

Bharat Electronics Ltd (BHE) reported a strong set of numbers which was above our estimates, led by healthy execution across its order book. As input cost pressures have eased, gross margins expanded by ~30bps/10bps YoY/QoQ. Owing to a low base of Q1FY22 EBITDA margins expanded ~1265bps YoY however on a sequential basis contracted ~830bps on account of negative operating leverage due to higher employee expenses. Ordering pipeline remains robust across segments such as electronic warfare system, army equipment like Akash weapon system, QRSAM, LRSAM, MRSAM and naval equipment like surveillance system, radars, navigation system, etc. Order inflows de?grew by 67% YoY taking its order book to ~Rs553.3bn (3.3x TTM revenue), providing revenue visibility for next few years. Management expects order inflows to the tune of ~Rs200bn in FY23 and maintained its revenue growth guidance of 15%.

Given strong tender pipeline, comfortable order book, healthy execution capabilities and diversification into newer business verticals we expect BHE to report 15%/21% revenue/PAT CAGR over FY22?24E. At CMP, the stock trades at 23.7x/19.2x FY23E/24E. Given the recent run?up in the stock price, we downgrade it to NEUTRAL with an unchanged TP of Rs280 valuing the company at PE of 20x (20x 10 years avg.) on FY24E EPS.

Result Highlights

* Sales grew 90% YoY to Rs31.1bn, above YSL estimate of ~Rs25.7bn on a low base of 1QFY22 which was impacted by the pandemic

* Gross margin expanded by ~30bps YoY to 41.9% in 1QFY23 as RM inflation has softened in the past quarter

* EBITDA came in at Rs5.1bn (YSL estimate Rs3.4bn) with EBITDA margins coming in at 16.5% vs 3.8% in 1QFY22, mainly on account of a low base. On a QoQ basis, margins contracted ~830bps due to negative operating leverage (higher than expected employee costs)

* PAT came in at Rs4.3bn vs YSL estimate of Rs2bn

* Order inflows came in at ~Rs8.7bn taking its order book ~Rs553.3bn (3.3x its trailing revenues)

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