FY21e-23e revenues are comfortably covered by the current order book.
Bharat Electronics (BEL) derated in FY19 immediately after the Ministry lowered margins on nominated projects to 7.5% from 10-12.5%. Investor issues on the uncertainty of the margin influence kept valuations subdued, regardless of the increasing order flow. Management explicitly talked about at its Nov. 2020 analyst meet, that FY20 has noticed the influence of reduce margins currently and 20% is sustainable. We think margin delivery, order flow and execution ramp-up will drive upside.
Visible Rs 565-bn order flow pipeline QRSAM is a new missile program order, which has a Rs 300-bn 10-year chance for BEL. Rs 150-200 bn of this really should come by means of in FY22e-23e. Rs 150-bn LRSAM missile program order really should come in FY22e. The above pipeline does not incorporate incremental orders that will open due to the import embargo initiated by the Ministry of Defence (MOD) in August 2020. Additionally, BEL is exploring development in non-defence regions.
Rs 521-bn order book at 4x FY20 revenues offers comfort on income development FY21e-23e revenues are comfortably covered by the current order book. Mgmt is confident of possibly carrying out double-digit income development in FY21e. We have single-digit development thinking about government devote could ramp-up steadily vs initial FY21e targets in the COVID-19 backdrop. MOD’s push for indigenisation will see BEL continue to obtain share, which started in FY15, in India’s defence devote.
Defence policy could raise nominated projects’ margins, a possible surprise Nearly 1/3rd of BEL’s projects are awarded on a nominated basis. Mgmt talked about that a fair quantity of FY20 revenues came from such projects beneath the revised reduce margins. Given this and the order book, they are confident of sustaining 20% margins in medium term. If an upward revision in nominated project margins come by means of, it will add to these margin assumptions.
FY20-23e 16% EPS CAGR BEL’s ROE really should after once again cross 20% in FY22e-23e, as execution ramps up and earnings development picks up post a challenging FY20. Mgmt talked about Rs 50-bn capex annually for the subsequent 3-5 years is most likely, vs. the typical annual capex of Rs 2.6 bn in FY10-20. BEL really should see some of the derating post the new margin policy reverse, provided the clarity on the margin outlook. Additionally, net money position, ROE upwards of 20% and systemic push for defence indigenisation major to development really should help earnings and valuations. We retain Buy with a revised PT of Rs 145, valuing BEL at 14x PE (avg PE given that Apr-08) Sept 22e vs 12x FY22e EPS earlier.