Bharat Electronics: Staying positive
We remain positive on Bharat Electronics following its AGM. The company
expects to end FY11 with an order book of Rs140bn, implying an expected order
inflow of Rs76bn, compared to a Rs50bn order inflow in FY10. We retain our
earnings estimates for FY10-13 and maintain our Buy rating on the stock.
We remain positive post AGM; order inflow in FY11 indicated at Rs76bn
We attended BEL’s AGM on 28 September and participated in discussions with
management. We maintain our positive view on the company. BEL expects an end-FY11
order book of Rs140bn. This compares to its FY10 order book of Rs113bn, which, on a
revenue base of Rs58bn in FY11F, implies an order inflow of Rs76bn (vs the Rs53bn order
inflow seen in FY10). We expect most of this order inflow to be back-ended, as the inflow in
FY11 ytd amounts to Rs27bn. BEL’s current order book stands at Rs127bn (as at August
2010). The company sees further opportunities in the Indian defence space and stated
during the discussion that it has had a 75% success rate on orders that require bidding.
We retain our FY10-13F sales CAGR of 11% and PAT CAGR of 20%
The company is targeting revenues of Rs100bn in FY13, although management admitted this
could be a stretch. We estimate Rs71.3bn in FY13, implying an 11% CAGR and trending in
line with the long-term growth rate shown by the company. With the bulk of the wage revision
behind it, BEL expects leverage from employee costs, which the company expects to fall as
a percentage of sales. This ties in with our thesis of margin expansion over FY10-13F in line
with the expected fall in employee costs relative to sales.
The best way to play the Indian defence story, in our view; maintain Buy
We maintain our Buy rating on BEL and believe it offers the best way to play the Indian
defence capex story. The stock is trading on a PE of 17x FY11F. BEL has expertise in niche
areas, making it the sole vendor for several defence orders. It is also a preferred supplier to
the Ministry of Defence by virtue of being partly government owned. In addition, BEL’s
relationships with foreign vendors help it gain offset orders (where a specified percentage of
the order value has to be met locally) over competitors.
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