Accumulate Bharat Electronics Ltd for Target Rs. 185 - Elara Capital
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Jump in growth momentum
BHE inflows 16% ahead of guidance
Bharat Electronics (BHE IN) has received several order inflows aggregating INR 87.9bn in Q3FY24 to date. Until FY24 YTD, cumulative order inflows stood at INR 231.7bn vs guidance of INR 200.0bn in FY24, 16% ahead of the target. Considering the past year’s order inflows, we believe there has been a sizeable rise in short-cycle orders toward radars, avionics, electronics warfare system, annual maintenance contracts for radars & other equipment, and spares & services.
Inflows likely to end year with INR 300bn, up 50% of its target
We expect order inflows to rise ~INR 300bn in FY24E, the highest-ever with further short-to-medium order pipeline of INR 40-45bn. Thus, order inflows are likely to be 50% ahead of guidance in FY24. Order pipeline includes electronics from the ship-building segment worth INR 20-25bn and radars worth INR 20bn
Revenue target slips slightly given the Israel-Hamas war
Management has revised down revenue growth target to 15% in FY24 from 17% on account of the ongoing Israel-Hamas war, which is likely to delay delivery of components in the missiles program, representing 3-4% of BHE orderbook of INR 687bn as on September 2023.
Order book at INR 687bn as on September 2023
Orderbook as on September 2023 stood at INR 687bn, up 5% QoQ, as implied order inflows spike 5.4x YoY to INR 73bn. H1FY24 inflows rose to INR 154bn. The book-to-bill ratio surged 3.3x FY24E revenue
Valuation: reiterate Accumulate with a higher
TP of INR 185 We lower our FY24E EPS by 0.5% on a cut in revenue growth but raise FY25E EPS by 6% and FY26E EPS by 8% on strong inflows and higher other income. We raise our TP by 19% to INR 185 on 27x (from 25x) FY25E P/E, as we roll forward to December. During FY16-18, BHE saw inflow momentum at a 20% CAGR; consequently, revenue growth momentum too jumped to 15% from 12%. We believe there has been a significant rise in inflow momentum, thereby resulting in stronger earnings growth. We reiterate Accumulate, led by India’s indigenization story in the defence space. We expect an earnings CAGR of 31% during FY23-26E with an ROE and ROCE of 25% each during FY24-26E.
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