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Steep execution challenge in Q4FY24

Q3 revenue below estimated on supply chain overhang

Bharat Dynamics’ (BDL IN) revenue rose 30% YoY to INR 6bn in Q3FY24, 18% below our estimates. Growth was likely led by execution of the Konkurs anti-tank guided missile (ATGM), and Astra Mk1. BDL regained execution momentum in Q3FY24 after three consecutive quarters of supply chain impact. And the management expected strong ramp-up in execution in H2FY24, which is now visible. But given recent geopolitical developments in the Middle East with the ongoing Russia-Ukraine war, BDL now expects to resolve supply chain concerns only by end-FY24. The management had earlier guided to achieve INR 32bn revenue in FY24. It expects revenue to peak in FY26-27 amid full-swing execution of large projects, such as Astra Mk1, ATGM, Akash, and exports.    

EBITDA margin up 40bps YoY to 19.7% in Q3

Gross margin improved 580bps YoY to 63.9%, likely on product mix. Employee cost rose 55% YoY while operating costs reduced 27%. EBITDA stood at INR 1.2bn, up 34% YoY, 25% below estimates, on lower-than-expected execution. EBITDA margin was 19.7%, up 40bps YoY.

Valuation: Downgrade to Reduce with higher TP of INR 1,600

We up FY24E EPS 1%, retain FY25E EPS and raise FY26E EPS 2% on higher other income. We increase our TP to INR 1,600 (from INR 1,360), on 25x (earlier 23x) December FY25E P/E. We downgrade BDL to Reduce from Buy on steep execution challenge in Q4FY24 to meet guidance and outperformance by 61% versus Nifty in the past three months.

We continue to be positive on BDL’s long-term story, based on strong inflow trajectory in FY25-27, robust orderbook of INR 200bn, and rising visibility in the exports business. Key monitorable would be QRSAM order in CY24. Expect an earnings CAGR of 87% in FY23-26E and ROE of 24% and ROCE of 12% in FY24-26E. We are optimistic on the defence indigenization story, supported by the unexplored exports market in the missiles segment. Key risks to our call are lower spending in defence capital budget, less allocation towards procurement, increased competition from the private sector, execution delay due to supply chain issues, and rise in commodity prices.