IGI Logo

Strong margin doesn’t move the needle for full year; Maintain Neutral

Our view

Bharat Electronics Ltd (BHE) reported a strong margin print on a lower-than-expected revenue growth driven by a robust gross margin. The company has maintained its guidance on revenue growth, margin, and order inflows (refer concall details). This indicates a potentially moderate order inflow in H2FY24 after meeting ~75% of full OI guidance in H1FY24. While the revenue growth has accelerated in FY23 (FY18-23 CAGR of 11%) and is expected to remain in the range of 15% over the next 2-3 years, margin expansion levers for the company seem limited. The company intends to focus on its core strengths in the next few years – radar systems, Electronic Warfare, Communication Systems while non-defense business is not going to move the needle in the short to medium term.

Looking Forward

While order inflow has remained robust in H1FY24 (Rs155bn, ~7x YoY), the company expects full year order inflow to be flat to slightly up (i.e. Rs200bn) from FY23. It remains cautious on guidance despite significant indigenization focus and acquisition announcements of large indigenous platforms given potential execution challenges in the near term. They have maintained capex guidance at ~Rs6-7bn which is higher than last 3 years’ run rate of ~Rs4.5-5.5bn. A significant chunk of this capex will go towards fuses, electro optics, EW systems, explosives, etc. The major order of QRSAM is expected to be bagged by FY25 and execution will be spread over 3-4 years. Given strong tender pipeline, comfortable order book, healthy execution capabilities and diversification into newer business verticals we expect BHE to report 16%/16% revenue/PAT CAGR over FY23-25E. At CMP, the stock trades at 27.5x/23.7x FY24E/25E. We have maintained our neutral stance with target price of Rs128 on the stock given steep valuation and lack of incremental triggers.

Result Highlights

* Sales grew 1% YoY to Rs39.9bn (YSLe ~Rs44.7bn). However, strong order inflow of ~Rs73.6bn led to a 30% YoY increase in orderbook to Rs687.3bn. This could translate into faster revenue growth going forward.

* Gross margin expanded by ~550bps YoY to 48.8%.

* EBITDA grew by 17% YoY to Rs10bn (YSL estimate Rs9.6bn) with EBITDA margin expanding 350bps YoY to 25.2%.

* Further, a significant improvement in other income (2.2x Q2FY23 OI) resulted in faster PAT growth. PAT stood at Rs8.1bn (+33% YoY) coming in above our estimates of Rs7.1bn.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632