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Strong performance and upbeat outlook

Bharat Electronics (BHE)’s 3QFY25 results came ahead of our estimates on all parameters. Revenue growth was led by a strong order book, which stood at INR771b. Order inflows stood at INR110b during 9MFY25. As highlighted in our top pick note (Link), we expect BHE to remain a key beneficiary of defense electronics opportunities of large platform orders across the army, navy, and air force. The company expects large order inflows from QRSAM, MRSAM, next-generation corvettes, the defense electronics portion from P75 and P75I, and even Kavach-related orders to materialize in the coming years starting from FY26. We expect the company’s revenue to post a 19% CAGR over FY24-27 driven by improved market share on account of enhanced wallet share as well as improved indigenized offerings. We trim our estimates to bake in lower other income and continue to value the company at 35x two-year forward earnings. We reiterate our BUY rating with an unchanged TP of INR360.

Robust growth with healthy margins and earnings beat

BHE’s results came ahead of our estimates on revenue, EBITDA, and PAT fronts. The 3QFY25 revenue surged 39% YoY to INR57.6b vs. our estimate of INR49.7b, indicating a 16% outperformance. This was driven by a strong order book of INR711b and an inflow of around INR110b during 9MFY25. EBITDA grew 58% YoY to INR16.5b, beating our estimate by 33%. EBITDA margin expanded YoY to 28.7% vs. our estimate of 25%. Gross margin contracted 30bp YoY to 48.0% in 3QFY25 vs. our estimate of 49.0%. Margin performance is dependent upon the project mix during the quarter. Strong margin performance resulted in a 28% beat in PBT and PAT vs. our estimates. PAT stood at INR13.2b, up 47.3% YoY vs. our estimate of INR10.3b. The company has maintained its guidance of more than 15% revenue growth, 23-25% EBITDA margin, and an inflow of INR250b for FY25.

To benefit from the upcoming opportunities across different platforms

BHE, as a leading PSU in defense electronics, is well-positioned to secure a significant share of orders for radar systems, TR modules, EW systems, and other critical subsystems. The company is constantly eyeing opportunities in all three platforms, i.e., the Indian Air Force, Indian Army, and Indian Navy. BHE is now evolving from the development of the EW sub-system to the development of the whole EW-suites. On the aircraft front, BHE already has orders for the development of EW sub-systems for the LCA MK-1a and has future opportunities from other projects such as MIG-29, LCH, LUH, ALH next, Jaguar aircraft, and MI-17, et. al. On the Army front, the company is expecting orders for QRSAM worth INR250b to flow in by the end of FY26. On the Navy front, management expects orders amounting to INR150b to come in for MRSAM and Next-Gen Corvettes by the end of FY26. We expect order inflows of INR250b/ INR360b/INR414b for FY25/FY26/FY27, and expect revenue CAGR of 17% for the same period.

Key order inflows announced so far

During 9MFY25, BHE received key orders such as INR42b for LRSAM, and INR11.5b worth of orders, including AMC of Akash Missile System, Combat Management System for Ships, Missile Fire Control System for ships, Laser Range Finders, Communication Network Centre, etc. It received INR31.72b of orders from AVNL for the supply and installation of an advanced, indigenously designed and developed Sighting and Fire Control System (FCS) for the upgrade of BMP 2/2K Tanks of the Indian Army, orders worth INR8.5b from Cochin Shipyard for the supply of indigenous multi-function radar in X-Band, INR9.7b worth of order including platform screen doors for metro rail, radars, communication equipment, jammers, etc. BHE also received multiple orders amounting to INRINR21.9b spread across maintenance of Akash Missile Systems, communication equipment, radars, seekers, jammers, test equipment, thermal imagers, fire control systems, navigational systems for ships, communication equipment, spares, services, etc., bringing the total accumulated orders to INR108.93b.

Financial outlook

We factor in large-sized order inflows from QRSAM and next-generation corvettes to materialize between FY26 and FY27 and raise our order inflow estimates. We also bake in the longer gestation period of these orders and expect a sales/EBITDA/ PAT CAGR of 17%/18%/20% over FY24-27. We expect OCF/FCF to remain strong over FY25-27, led by control over working capital. Further, the company had a cash surplus of INR110b (as of FY24), providing scope for further capacity expansion.

Key risks and concerns

A slowdown in order inflows from the defense and non-defense segments, intensified competition, further delays in the finalization of large tenders, a spike in commodity prices, and delays in payments from the MoD can adversely impact our estimates on revenue, margins, and cash flows.

Valuation and view

BHE is currently trading at 35.7x/29.5x on FY26E/FY27E EPS. We tweak our estimates to account for higher margin estimates and lower other income and maintain our fair value of INR360 on 35x Mar’27E. We reiterate our BUY rating on the stock with an unchanged TP of INR360.

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