Bharat Electronics: No worries :: RBS

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Bharat Electronics
No worries
Our discussion with the company indicates 1H weakness stems from the order
book mix. We expect the company to improve its MoU target in FY11. We retain
our earnings forecasts for FY10-13 and our Buy rating, as we view the current
decline in the stock price as an opportunity to buy.


Company is on track to meet its FY11F guidance, in our view
BEL reported 2Q11 revenues of Rs9.8bn (down 25.3% yoy), while profit came in at Rs1bn
(down 56.2% yoy). Although the numbers seem disappointing, based on our discussion with
management, we believe BEL is on track to meet its FY11 revenue MoU target of Rs57bn.
According to management, the skew in the 1H was caused by the mix in the current order
book. Management expects profitability to improve in 2H11 and is targeting a PBT margin of
18% for FY11. The company’s current order book is around Rs127bn, and management
expects a couple of large orders during 2H11 (as stated in its AGM). We note that historically
revenues have been back-ended with EBITDA margin expansion in the second half of the
financial year. We expect a similar performance in 2H11 and believe Bharat Electronics is on
track to meet our FY11 forecasts with a stronger 2H11 performance.
We retain our FY10-13 forecasts of a sales CAGR of 11% and a PAT CAGR of 20%
BEL has registered consistent revenue growth over the past decade. We forecast revenue of
Rs71.3bn for FY13, implying an 11% CAGR and in line with the company’s growth rate of the
past decade. We expect its margin to expand over FY10-13 as employee costs moderate
and because the bulk of its wage revision has already been completed. We believe this
should lead to a higher profit CAGR of 20% over FY10-13.
BEL is the best way to play the Indian defence story, in our view; Buy maintained
We maintain our Buy rating on BEL with a target price of Rs2105. We believe BEL offers the
best way to play the Indian defence capex story. It has expertise in niche areas, making it the
sole vendor for several defence orders. It is a preferred supplier to the Ministry of Defence by
virtue of being partly government-owned. In addition, its relationships with foreign vendors
help it to gain offset orders (where a specified percentage of the order value must be met
locally) over competitors. Its current order book implies Rs2.4x FY10F sales and provides
strong visibility in term of future revenues.