Buy Bharat Electronics Ltd for the Target Rs.490 by Motilal Oswal Financial Services Ltd
Strong margin performance
BHE’s 1QFY26 PAT exceeded our estimate, driven by better-than-expected margins. Revenue growth was aided by a strong order book, though it was affected to some extent by geopolitical issues. The order book was strong at INR749b and order inflows stood at INR76b. The company has maintained its guidance on revenue and order inflows and expects margins to remain strong at 27%. We expect the company to benefit from emergency procurement and the finalization of larger platform orders from the Army, Navy and Air Force. We also expect BHE to benefit from incremental opportunities in exports as defense spending increases globally. We marginally tweak our estimates and maintain BUY with a TP of INR490 based on 45x Sep’27E EPS.
Earnings beat driven by margin outperformance
1Q EBITDA and PAT came in ahead of our estimates. Revenue grew 5% YoY to INR44.2b, missing our estimate of INR48.4b by 9%. The order book stood strong at INR748.6b, with an inflow of ~INR76.3b (+53% YoY) during the quarter. Gross margin at 53.2% was ahead of our estimate of 45.2%, aided by a better project mix. This led to EBITDA growth of 32% YoY to INR12.4b, beating our estimate by 15%. EBITDA margin expanded 580bp YoY to 28.1% vs. our estimate of 22.3%. Strong margin performance resulted in a 15%/16% beat to our PBT/PAT estimates. PAT was up 25% YoY at INR9.7b vs. our estimate of INR8.4b.
Prospect pipeline remains strong
BHE has a robust pipeline of upcoming orders across multiple high-value programs, providing strong revenue visibility beyond FY26. Key expected orders are: 1) QRSAM order estimated at INR250b, for which DAC approval has been received in July and it is expected to be finalized by 4QFY26; 2) multiple subsystem orders for the MF-STAR radar program, which are currently under configuration and pricing discussions with shipyards and are likely to be awarded in 2HFY26, with some spill-over into 1QFY27; 3) Shatrughat and Samaghat electronic warfare (EW) systems with a combined opportunity size of INR65b are also progressing well and RFP for one program has already been issued; 4) follow-on order for 97 LCA Mk1A aircraft (excluding Uttam AESA radar) worth INR30b; and 5) drone and loitering munition programs (e.g., Archer UAV, MALE-class drones) expected in the next 12-18 months. If timely converted, these opportunities could not only bolster the INR270b inflow guidance but also support 15-17% annual growth over the medium term, aided by BHE’s rising share in indigenous and strategic systems.
Key order inflows announced so far
Key orders won during YTDFY26 worth INR100b include – 1) EW suite worth INR22.1b from IAF; 2) maintenance service for Akash missile worth INR5.9b from IAF; 3) orders worth INR5.7b for integrated drone detection and software defined radio; 4) orders worth INR5.4b for communication systems for ships, jammers, simulator upgrades, etc.; 5) order worth INR23.2b for supply of base and depot spares for missile systems on Indian naval ships; 6) order for fire control and sighting system for missile for INR5.85b; 7) radars and communication equipment etc. worth INR5.3b; 8) navigation system for guns, jammers, seekers, active antenna array unit worth INR5.6b; 9) air defense fire control radar (Atulya) worth INR16.4b from Indian Army; 10) optronic systems, IFMIS software, communication and control terminal, low band receive unit and communication equipment worth INR5.5b. We bake in order inflows of INR270b/INR584b for FY26/27E.
Key orders to be executed in FY26
In the remaining nine months of FY26, BHE plans to execute several large-scale programs contributing to its revenue growth target of over 15%. Key among these are: 1) LRSAM worth INR30b, 2) Himshakti EW system worth INR17b, and 3) Akash missile system of INR13b. Other notable contributors include the D-29 upgrade, LRU supplies for LCA, Arudhra radar, and Link II communication systems, each estimated to contribute INR6b-8b. Additionally, systems like Shakti EW and BMP-2 upgrades will add around INR5b. The company has aligned its execution schedule with user readiness and internal capacities, providing high confidence in achieving the targeted delivery. We have estimated a revenue CAGR of 18% over FY25-28E.
Expanding global reach with indigenous sonar solutions
BHE continues to strengthen its leadership in the sonar domain, positioning itself as the primary production partner for NPOL, DRDO’s designated sonar development lab. The company is actively involved in the development and supply of a wide range of sonar systems, including side-scan sonar and integrated sonar suites for naval platforms. BHE is also working on export-ready variants and enhancing capabilities by embedding AI/ML-based features for higher performance and autonomy. With strategic investments, in-house R&D, and close user collaboration, BHE is set to deepen its role in the indigenous underwater warfare ecosystem. The company indicated minimal dependence on foreign suppliers for sonar systems, underscoring its readiness to address growing domestic and export demand in this segment.
Financial outlook
Our estimates factor in large-sized order inflows from QRSAM and next-generation corvettes to materialize between FY26 and FY27. We also bake in longer gestation period for these orders and expect a sales/EBITDA/PAT CAGR of 18%/17%/17% over FY25-28. We expect OCF/FCF to remain strong over FY26-28, led by control over working capital. Further, the company had a cash surplus of INR94b (as of FY25), providing scope for further capacity expansion.
Valuation and view
BHE is currently trading at 47.0x/39.3x/33.0x on FY26E/FY27E/FY28E EPS. We maintain our two-year forward TP of INR490 based on 45x Sep’27E earnings and maintain BUY rating on BHE.
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 sharp rise in commodity prices, and delays in payments from the MoD can adversely impact our estimates on revenue, margins, and cash flows.
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