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Higher margins drive PAT beat; growth priced in

BEL’s 3QFY24 EBITDA margin and PAT came in ahead of our estimates despite weak revenue growth. Near-term challenges in the supply chain affected BEL’s revenue growth. Order inflows surpassed the company’s guidance due to the up-fronting of orders during the quarter. We expect BEL to be a key beneficiary of the increasing defense indigenization. However, we believe the current stock price already bakes in 15%/16% CAGRs over FY23-26 in order inflows/revenue, including large orders such as QRSAM, hence lacks re-rating potential in the near term. The finalization of large orders will be positive for the company; however, they will also have an elongated execution period. We, thus, maintain our Neutral rating on BEL with a revised TP of INR190 based on 29xMar’26E EPS and would look for better entry points in the stock.

Better-than-expected margins drive a beat in PAT BEL’s revenue at INR41.4b (flat YoY/+4% QoQ) came in below our estimates of INR51.4b owing to weaker-than-expected execution. Revenue growth has not kept pace with order inflow growth in recent quarters due to supply chainrelated challenges. In 3Q, BEL faced supply chain issues in Israel, which led to INR5b miss in revenue booking. EBITDA grew by 23% YoY to INR10.4b, aided by better-than-expected gross margin at 48.3% (up ~680bp YoY). As a result, EBITDA margin expanded ~470bp YoY to 25.4% (management maintains full year guidance of ~21-23%). PAT at INR8.9b (+49% YoY) beat our estimates on the back of lower-than-expected depreciation, a lower effective tax rate, and higher other income (+288% YoY). Order inflows stood at INR272b in 9MFY24 vs. INR37.3b in 9MFY23, mainly due to the government’s continued focus on defense indigenization and up-fronting of orders before the elections. As a result, the order book increased by 52% YoY to INR762b (4.2x TTM revenue).

Strong order inflows in 9MFY24, much ahead of initial guidance BEL announced strong inflows of INR272b in 9MFY24. These inflows have been diversified across various items of defense, such as supply of fuses, NGOPV, radars, platforms, etc. The order pipeline also remains strong and BEL expects defense orders from EW system, BMP upgrade, avionics, QRSAM, etc. The company has given order inflow guidance of INR250b for FY25/FY26 each, which also includes a QRSAM package of INR200b. The inflow pipeline from the non-defense segment will be driven mainly by air traffic management, metros, cyber security, EVM, and VVPAT. The company is already working with AIIMS to enhance cyber security systems and with the Ministry of Health on IT infrastructure upgrade-related projects. The company has maintained its revenue growth guidance of 15% for FY24 despite a muted performance in 9MFY24; this calls for a high ask rate for revenue for 4QFY24.

Supply chain issues to gradually ease out BEL’s revenue was impacted by supply chain issues in Israel, which led to a spill-over of INR5b in revenue to 4Q. Israel accounts for around INR45b of the current order book, which includes projects such as LRSAM, EW system, and electro optics. The company is working with partners in Israel to tide over the issue. BEL is also indigenizing components that it is procuring from Russia such as tank electronics, which will reduce its dependence from next year. The Red Sea issue does not have a major impact on BEL’s supply chain. However, semiconductor-related issues do impact the company.

BEL is a key beneficiary of increasing defense indigenization Based on the breadth of offerings, BEL is a key beneficiary of the product import embargo lists released by the Ministry of Defense. It has a presence across products such as different types of radars, simulators, EW systems, electronic fuses, thermal imaging, integrated air command and control system, border surveillance system, and counter-drone systems, which will be indigenized over the next five years. We expect BEL to be a key beneficiary of an opportunity potential of INR5t from all four import embargo lists released so far.

Financial outlook We expect a CAGR of 16%/15%/15% in sales/EBITDA/PAT over FY23-26. We expect OCF/FCF to remain strong over FY23-26 given its control over working capital. Further, the company had a cash surplus of INR39b (as of FY23), providing scope for further expansion in capacities.

Key risks and concerns A slowdown in order inflows from the defense and non-defense segments, increased competition, further delays in finalization of large tenders, a sharp rise in commodity prices and delays in payments from MoD can adversely impact our estimates on revenues, margins and cash flows

Valuation and view BEL is currently trading at 33.6x/30.0x on FY25E/FY26E EPS. With a large addressable market of nearly INR5t over the next 5-7 years from the defense indigenization and the scope of improvement in non-defense segments, we expect the company to benefit from the same. We value BEL at P/E of 29x Mar’26E EPS and revise our TP to INR190. We maintain a Neutral rating on the stock.

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