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BHARAT ELECTRONICS LTD (BEL)
RECOMMENDATION: BUY
TARGET PRICE: RS.1886
FY12E P/E: 13.9X
We recently spoke to the management of Bharat Electronics. Presented here
are a few highlights
q The company's order backlog has improved substantially in the current
fiscal to Rs 160 bn providing a revenue visibility of 37 months.
q Order intake has accelerated in 9MFY11 and the company expects momentum
to be maintained in the Q4 as well. Thus we project the company
to end the year with a order backlog of Rs 180-185 bn which would
be higher by 60%.
q The company has set an ambitious target of generating revenues of Rs
100 bn by FY13, which implies a growth of 32% CAGR between FY11-13.
q The stock has outperformed the market in the past three months. While
most capital goods companies have struggled to meet their order intake
targets in FY11, BEL has managed to grow it substantially. The company
is also least exposed to commodity price pressures. Given these positives,
we maintain BUY with an unchanged price target of Rs.1886
Robust Order backlog
n BEL commenced the fiscal with an order backlog of Rs 113.5 bn. Following overall
improvement in the momentum of procurement of defence equipment, the
order book of the company has improved considerably. At the end of 9MFY11,
the order book stood at Rs 160 bn.
n The current order backlog translates into revenue visibility of 37 months of trailing
four quarter sales, which is the highest in recent years.
n Apart from general defence electronics, the company is executing orders for
Akash Missles and radar systems.
n In the 9MFY11, the order intake has been robust at close to Rs 82 bn. As against
this, order intake in FY10 was estimated to be in the range of Rs 60-62 bn. BEL
has during the fiscal received an order for six squadrons of the Akash Missile
System worth Rs 36.2 bn from the IAF, which is in addition to the existing order
for two squadrons worth Rs 12.2 bn. BEL will deliver the first squadron by June
2011 and second squadron by December 2011
n The company expects to add orders worth Rs 50 bn in the Q4 FY11, which
should enable the company to end the year with a healthy order backlog of Rs
180-185 bn.
n Some of the major orders expected over the next two months include an order
from the Indian Coast Guard for Coastal Surveillance System valued at Rs 2.2 bn,
Battlefield Surveillance System valued at Rs 25 bn and Weapon Locating Radar
from the Army. There will be some more orders pertaining to upgrades of several
projects executed earlier.
n BEL is also expecting the Army to place an order with the Bharat Dynamics Limited
(BDL) for the Army version of the Akash Weapon System valued at Rs 120
bn. Of this, Rs 37 bn of business will flow to BEL. While the Air Force version of
Akash Weapon System is integrated by BEL, the Army version will be done by
BDL in association with BEL and companies from the private sector.
n Thus, the management expects to end the year with a healthy order backlog,
which could be higher by 60%.
Management optimistic of meeting the revenue target of Rs 57
bn in FY11
The management is optimistic of achieving its FY2011 MoU sales target of Rs 57 bn
for "excellent" rating performance. The revenue mix is expected to remain broadly
unchanged at 85% and 15% for defense and non-defense segments, respectively.
In the 9M FY11, revenues have posted a decline of 5% yoy to Rs 32.8 bn implying
that the company needs to deliver revenue growth of 43% yoy in Q4 FY11.
Medium-term target is to reach Rs 100 bn in turnover by FY13
BEL has set a challenging target of reaching Rs 100 bn in turnover by FY13. This
implies a CAGR of 32% between FY11-13. The company is expecting its strategic
business units at Ghaziabad and Bangalore to start contributing significantly to
growth. These units are well equipped to deliver the requisite growth.
New Initiatives
BEL has appointed KPMG, a global consulting firm to help identify future market
opportunities for growth. The consulting firm has recommended the following areas
to venture into (a) Homeland Security, (b) Nuclear Power Instrumentation and (c)
Solar Power.
BEL has signed Memorandum of Understanding (MOU) with BHEL for to explore formation
of a JV for solar photovoltaic business.
The company also plans to increase its R&D spend from current level of 5-6% of
revenues to 8% of revenues in future.
Valuation
BEL is trading at 17.5x and 13.9x FY11 and FY12 earnings respectively.
Given the strong order accretion in 9M FY11, low material cost intensity of business
(58% of revenues), superior earnings growth profile and debt-free status makes it a
preferred play within capital goods companies.
We maintain BUY with an unchanged DCF based target price of Rs 1886. At our
target price, the stock will be priced at 15.4x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BHARAT ELECTRONICS LTD (BEL)
RECOMMENDATION: BUY
TARGET PRICE: RS.1886
FY12E P/E: 13.9X
We recently spoke to the management of Bharat Electronics. Presented here
are a few highlights
q The company's order backlog has improved substantially in the current
fiscal to Rs 160 bn providing a revenue visibility of 37 months.
q Order intake has accelerated in 9MFY11 and the company expects momentum
to be maintained in the Q4 as well. Thus we project the company
to end the year with a order backlog of Rs 180-185 bn which would
be higher by 60%.
q The company has set an ambitious target of generating revenues of Rs
100 bn by FY13, which implies a growth of 32% CAGR between FY11-13.
q The stock has outperformed the market in the past three months. While
most capital goods companies have struggled to meet their order intake
targets in FY11, BEL has managed to grow it substantially. The company
is also least exposed to commodity price pressures. Given these positives,
we maintain BUY with an unchanged price target of Rs.1886
Robust Order backlog
n BEL commenced the fiscal with an order backlog of Rs 113.5 bn. Following overall
improvement in the momentum of procurement of defence equipment, the
order book of the company has improved considerably. At the end of 9MFY11,
the order book stood at Rs 160 bn.
n The current order backlog translates into revenue visibility of 37 months of trailing
four quarter sales, which is the highest in recent years.
n Apart from general defence electronics, the company is executing orders for
Akash Missles and radar systems.
n In the 9MFY11, the order intake has been robust at close to Rs 82 bn. As against
this, order intake in FY10 was estimated to be in the range of Rs 60-62 bn. BEL
has during the fiscal received an order for six squadrons of the Akash Missile
System worth Rs 36.2 bn from the IAF, which is in addition to the existing order
for two squadrons worth Rs 12.2 bn. BEL will deliver the first squadron by June
2011 and second squadron by December 2011
n The company expects to add orders worth Rs 50 bn in the Q4 FY11, which
should enable the company to end the year with a healthy order backlog of Rs
180-185 bn.
n Some of the major orders expected over the next two months include an order
from the Indian Coast Guard for Coastal Surveillance System valued at Rs 2.2 bn,
Battlefield Surveillance System valued at Rs 25 bn and Weapon Locating Radar
from the Army. There will be some more orders pertaining to upgrades of several
projects executed earlier.
n BEL is also expecting the Army to place an order with the Bharat Dynamics Limited
(BDL) for the Army version of the Akash Weapon System valued at Rs 120
bn. Of this, Rs 37 bn of business will flow to BEL. While the Air Force version of
Akash Weapon System is integrated by BEL, the Army version will be done by
BDL in association with BEL and companies from the private sector.
n Thus, the management expects to end the year with a healthy order backlog,
which could be higher by 60%.
Management optimistic of meeting the revenue target of Rs 57
bn in FY11
The management is optimistic of achieving its FY2011 MoU sales target of Rs 57 bn
for "excellent" rating performance. The revenue mix is expected to remain broadly
unchanged at 85% and 15% for defense and non-defense segments, respectively.
In the 9M FY11, revenues have posted a decline of 5% yoy to Rs 32.8 bn implying
that the company needs to deliver revenue growth of 43% yoy in Q4 FY11.
Medium-term target is to reach Rs 100 bn in turnover by FY13
BEL has set a challenging target of reaching Rs 100 bn in turnover by FY13. This
implies a CAGR of 32% between FY11-13. The company is expecting its strategic
business units at Ghaziabad and Bangalore to start contributing significantly to
growth. These units are well equipped to deliver the requisite growth.
New Initiatives
BEL has appointed KPMG, a global consulting firm to help identify future market
opportunities for growth. The consulting firm has recommended the following areas
to venture into (a) Homeland Security, (b) Nuclear Power Instrumentation and (c)
Solar Power.
BEL has signed Memorandum of Understanding (MOU) with BHEL for to explore formation
of a JV for solar photovoltaic business.
The company also plans to increase its R&D spend from current level of 5-6% of
revenues to 8% of revenues in future.
Valuation
BEL is trading at 17.5x and 13.9x FY11 and FY12 earnings respectively.
Given the strong order accretion in 9M FY11, low material cost intensity of business
(58% of revenues), superior earnings growth profile and debt-free status makes it a
preferred play within capital goods companies.
We maintain BUY with an unchanged DCF based target price of Rs 1886. At our
target price, the stock will be priced at 15.4x.
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