Buy Bharat Electronics Ltd For Target Rs.500 by Choice Institutional Equities Ltd
Near-term Margin Blip; Structural Growth Story Intact
BHE reported a steady Q1FY27 performance, with revenue growth remaining healthy (~25% YoY), supported by continued execution across key defence programmes. However, profitability saw some moderation, with EBITDA margin at ~25.8%, primarily impacted by product mix, while PAT growth remained relatively muted (~8% YoY). We believe the margin softness is transient; the management reiterated confidence in sustaining ~28% EBITDA margin at the fullyear level.
What gives us comfort is the order inflow outlook. Despite a weak start to the year (INR ~37 Bn inflows in Q1), the management has maintained its FY27 guidance of INR 550+ Bn and, from the commentary, it does appear that inflows are back-ended. We believe large programmes, such as QRSAM, will drive a meaningful share of inflows
We believe BHE continues to play with its core strengths – diversified exposure across Army, Navy and Air Force, which provides stability in execution and limits concentration risks, along with a steady move up the value chain. In our opinion, this should support margin structurally. At the same time, bets on drones, EW and exports provide incremental growth optionality. Overall, we continue to like the medium-term growth story, with near-term volatility (margin/order inflows) likely to persist, but earnings trajectory remains intact.
Healthy Topline Growth, Margin Remains Soft
* Revenue for Q1FY27 up 24.9% YoY and down 45.7% QoQ at INR 55.5 Bn (vs CIE est. INR 47.9 Bn)
* EBITDA for Q1FY27 up 12.1% YoY and down 53.4% QoQ at INR 13.9 Bn (vs CIE est. INR 12.5 Bn). EBITDA margin stood at 25.0%, contracted by 286 bps YoY and 413 bps QoQ (vs CIE est. of 26.0%)
* PAT for Q1FY27 up 8.8% YoY and down 52.6% QoQ at INR 10.5 Bn (vs CIE est. INR 9.9 Bn). PAT margin stood at 19.0%, contracted by 282 bps YoY and 276 bps QoQ (vs CIE est. 20.6%)
View & Valuation:
We maintain our positive stance on BHE, underpinned by its robust long-term growth visibility, supported by a healthy orderbook and strong order pipeline. Reiterating our ‘BUY’ rating with a TP of INR 500, we value it at 40x of FY28E EPS.
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