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Bharat Electronics (BHE)
Industrials
In-line results; but concerns on dip in contribution margin, high 4Q asking rate.
Bharat Electronics reported revenues of Rs13.3 bn, 9.8% above estimates and up
10.7% yoy. EBITDA margin at 16.2% (in-line) was significantly below 3QFY10 margin
primarily led by higher raw material cost as percentage of sales. Net PAT at Rs1.7 bn
was broadly in line with our estimates. We highlight potential risk to full-year estimates
and MOU target for ‘excellent’ rating which implies a strong asking rate for 4QFY11E.
Broadly in-line results; but highlight concerns on sharp dip in contribution margins
Revenue pick-up. Revenues at Rs13.3 bn were up 10.7% versus 3QFY10 (Rs12.4 bn) and beat
estimates by 9.8%. We had assumed flat revenue growth (Rs12.5 bn) for the quarter.
EBITDA margin in line; sharp decline in contribution margin. EBITDA margin at 16.2%
were in line with our estimates (15.8%) and significantly below 3QFY10 margins of 24.9% due
to higher raw material cost as a percentage of sales.
PAT in line due to lower other income. Other income at Rs460 mn was 32.2% down qoq
and significantly below our estimates of Rs826 mn. This resulted in a net PAT of Rs1.7 bn, down
23.8% yoy, in line with our estimates.
9M performance. For 9MFY11, revenues were down 5.3% to Rs32.7 bn versus Rs34.6 bn in
9MFY11. EBITDA margin also declined by 810 bps to 12.9% versus 21.1% in 9MFY10 due to
negative operating leverage (higher employee cost as %age of sales).
FY2011E MOU rating target and estimates imply high asking rate in 4Q
BEL has an FY2011E MoU target of Rs56.2 bn — which would qualify the company for the Indian
government’s ‘Excellent’ MOU rating. This implies a sedate yoy revenue growth of only 8.2% for
FY2011E at the standalone level. The management’s target for revenues of Rs56.2 bn in FY2011E
implies a revenue requirement of about Rs23.4 bn in 4QFY11E, a growth of about 29% over
4QFY10 revenues of Rs18 bn. We build in full-year revenue estimates of Rs57 bn, marginally
higher than MOU target. Our estimates also implies strong EBITDA margin of 27.2% in 4QFY11E.
Retain estimate; reiterate REDUCE rating with a target price of Rs1,800/share
We retain our estimates of Rs106 and Rs120 for FY2011E and FY2012E, respectively. We reiterate
our REDUCE rating (TP: Rs1,800) based on (1) potential long-term increase in competition, (2) lack
of publicly available data points, (3) potential margin dilution based on shift to system integration
orders and (4) infrequent investor communication.
In-line results; but sharp dip in concentration margin is a worry
BEL reported 3QFY11 revenues of Rs13.7 bn, up 10.7% yoy and about 9.4% ahead of our
estimates. Sharp dip in EBITDA margin to 16.2% was broadly in line with our results. BEL
reported net income of Rs1.7 bn in 3QFY11, down 23.8% yoy versus Rs2.2 bn in 3QFY10 –
broadly in line with our estimate. The higher-than-expected revenues were offset by lowerthan-
expected other income to lead to in-line PAT.
For the nine months ending December 31, 2010, BEL has reported revenues of Rs32.7 bn,
down 5.3% yoy. EBITDA margins were significantly down by 870 bps yoy to 12.9% leading
to a net PAT decline of 33% yoy to Rs3.56 bn in 9MFY11 from Rs5.3 bn in 9MFY10.
Margins at 16.2% marginally ahead of estimates; however, note sharp dip in
contribution margins
BEL reported EBITDA margin of 16.2%, significantly (about 870 bps) lower on a yoy basis.
But this was broadly in line with our estimate of about 15.8%. However, we note that raw
materials as a percentage of sales increased to 59.2% in this quarter versus 55% in 2QFY11
and our expectation of about 56%. The higher-than-expected material cost was offset by
lower-than-expected employee costs as a percentage of sales. Employee cost absolute figure
has declined by about 8.4% on a qoq basis (to Rs2.46 bn from Rs2.7 bn in 2QFY11) versus
our expectation of sequentially flat employee cost.
FY2011E MOU rating target and estimates imply high asking rate in 4Q
BEL has a FY2011E MoU target of Rs56.2 bn — which would qualify the company for the
Indian government’s ‘Excellent’ MOU rating. This implies a sedate yoy revenue growth of
only 8.2% for FY2011E at the standalone level. The management’s target for revenues of
Rs56.2 bn in FY2011E implies a revenue requirement of about Rs23.4 bn in 4QFY11E, a
growth of about 29% over 4QFY10 revenues of Rs18 bn.
BHEL’s ‘Excellent’ target marginally below estimates; highlight downside risk
The target for the ‘Excellent’ rating is marginally below our standalone revenue estimate of
Rs57 bn. Hence, we believe that there could be a downside risk to our revenue estimate of
FY2011E incase the company only manages to meet its ‘Excellent’ rating level and no more.
We highlight that BEL only just about met its FY2010 MoU target of Rs52 bn for to qualify
for an ‘Excellent’ rating —it reported standalone revenues of Rs51.8 bn in FY2010.
Estimates imply moderate revenue growth, strong margin expansion in rem. 9M
We have built in standalone revenues of about Rs57 bn in FY2011E with an EBITDA margin
of 17.4%. Our full-year estimates imply revenue growth requirement of 34% in 4QFY11E.
The estimates also imply strong EBITDA margin of 27.2% in 4QFY11E versus 9.5% in
4QFY10. However, note that 4QFY10 margins were primarily impacted by higher employee
costs, 21.7% of sales versus 8.5% in 4QFY09, led by provision for wage revision for
employees.
Target revenues of Rs100 bn by FY2013E seem aggressive
The management cited its target to achieve revenues of Rs100 bn by FY2013E implying very
high growth requirement of 23% CAGR over FY2010-13E. The management expects the
revenue growth to be driven by the systems segment and expects the systems share to total
revenue to increase to 50% in FY2013E from present levels of about 30% in FY2010.
Note that the company had earlier set the Rs100 bn revenue target for FY2012E and has
postponed this by a year. Furthermore, the company has historically grown at an average
rate of only about 10-13% — recorded 11% revenue CAGR over the past seven years
(FY2003-10).
Retain earnings estimates; reiterate REDUCE with a target price of Rs1,800
We have retained our earnings estimates of Rs106 and Rs120 for FY2011E and FY2012E
respectively and our 15X March-12E earnings based target price of Rs1,800/share. We
reiterate our REDUCE rating on the stock based on (1) potential long-term increase in
competition given that several firms may be awarded the Raksha Udyog Ratna status, (2)
likelihood that BEL would miss large part of offset related upside as that may be dominated
by private sector manufacturing and design companies such as L&T etc. (3) lack of publicly
available data points/news flows to justify more optimism, (4) potential margin dilution led
by higher proportion of order inflows/ revenues from system integration orders and (5)
infrequent investor communication and disclosures.
We maintain our view that as the economic outlook improves the stock is likely to
underperform as its business is independent of business cycles and is more attractive when
outlook on broad economy is weaker.
Key upside risks arise from (1) new initiatives in naval and nuclear areas, (2) nondefense/
offset-related orders, (3) strong execution over the next few quarters and (4) betterthan-
expected margins.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
Bharat Electronics (BHE)
Industrials
In-line results; but concerns on dip in contribution margin, high 4Q asking rate.
Bharat Electronics reported revenues of Rs13.3 bn, 9.8% above estimates and up
10.7% yoy. EBITDA margin at 16.2% (in-line) was significantly below 3QFY10 margin
primarily led by higher raw material cost as percentage of sales. Net PAT at Rs1.7 bn
was broadly in line with our estimates. We highlight potential risk to full-year estimates
and MOU target for ‘excellent’ rating which implies a strong asking rate for 4QFY11E.
Broadly in-line results; but highlight concerns on sharp dip in contribution margins
Revenue pick-up. Revenues at Rs13.3 bn were up 10.7% versus 3QFY10 (Rs12.4 bn) and beat
estimates by 9.8%. We had assumed flat revenue growth (Rs12.5 bn) for the quarter.
EBITDA margin in line; sharp decline in contribution margin. EBITDA margin at 16.2%
were in line with our estimates (15.8%) and significantly below 3QFY10 margins of 24.9% due
to higher raw material cost as a percentage of sales.
PAT in line due to lower other income. Other income at Rs460 mn was 32.2% down qoq
and significantly below our estimates of Rs826 mn. This resulted in a net PAT of Rs1.7 bn, down
23.8% yoy, in line with our estimates.
9M performance. For 9MFY11, revenues were down 5.3% to Rs32.7 bn versus Rs34.6 bn in
9MFY11. EBITDA margin also declined by 810 bps to 12.9% versus 21.1% in 9MFY10 due to
negative operating leverage (higher employee cost as %age of sales).
FY2011E MOU rating target and estimates imply high asking rate in 4Q
BEL has an FY2011E MoU target of Rs56.2 bn — which would qualify the company for the Indian
government’s ‘Excellent’ MOU rating. This implies a sedate yoy revenue growth of only 8.2% for
FY2011E at the standalone level. The management’s target for revenues of Rs56.2 bn in FY2011E
implies a revenue requirement of about Rs23.4 bn in 4QFY11E, a growth of about 29% over
4QFY10 revenues of Rs18 bn. We build in full-year revenue estimates of Rs57 bn, marginally
higher than MOU target. Our estimates also implies strong EBITDA margin of 27.2% in 4QFY11E.
Retain estimate; reiterate REDUCE rating with a target price of Rs1,800/share
We retain our estimates of Rs106 and Rs120 for FY2011E and FY2012E, respectively. We reiterate
our REDUCE rating (TP: Rs1,800) based on (1) potential long-term increase in competition, (2) lack
of publicly available data points, (3) potential margin dilution based on shift to system integration
orders and (4) infrequent investor communication.
In-line results; but sharp dip in concentration margin is a worry
BEL reported 3QFY11 revenues of Rs13.7 bn, up 10.7% yoy and about 9.4% ahead of our
estimates. Sharp dip in EBITDA margin to 16.2% was broadly in line with our results. BEL
reported net income of Rs1.7 bn in 3QFY11, down 23.8% yoy versus Rs2.2 bn in 3QFY10 –
broadly in line with our estimate. The higher-than-expected revenues were offset by lowerthan-
expected other income to lead to in-line PAT.
For the nine months ending December 31, 2010, BEL has reported revenues of Rs32.7 bn,
down 5.3% yoy. EBITDA margins were significantly down by 870 bps yoy to 12.9% leading
to a net PAT decline of 33% yoy to Rs3.56 bn in 9MFY11 from Rs5.3 bn in 9MFY10.
Margins at 16.2% marginally ahead of estimates; however, note sharp dip in
contribution margins
BEL reported EBITDA margin of 16.2%, significantly (about 870 bps) lower on a yoy basis.
But this was broadly in line with our estimate of about 15.8%. However, we note that raw
materials as a percentage of sales increased to 59.2% in this quarter versus 55% in 2QFY11
and our expectation of about 56%. The higher-than-expected material cost was offset by
lower-than-expected employee costs as a percentage of sales. Employee cost absolute figure
has declined by about 8.4% on a qoq basis (to Rs2.46 bn from Rs2.7 bn in 2QFY11) versus
our expectation of sequentially flat employee cost.
FY2011E MOU rating target and estimates imply high asking rate in 4Q
BEL has a FY2011E MoU target of Rs56.2 bn — which would qualify the company for the
Indian government’s ‘Excellent’ MOU rating. This implies a sedate yoy revenue growth of
only 8.2% for FY2011E at the standalone level. The management’s target for revenues of
Rs56.2 bn in FY2011E implies a revenue requirement of about Rs23.4 bn in 4QFY11E, a
growth of about 29% over 4QFY10 revenues of Rs18 bn.
BHEL’s ‘Excellent’ target marginally below estimates; highlight downside risk
The target for the ‘Excellent’ rating is marginally below our standalone revenue estimate of
Rs57 bn. Hence, we believe that there could be a downside risk to our revenue estimate of
FY2011E incase the company only manages to meet its ‘Excellent’ rating level and no more.
We highlight that BEL only just about met its FY2010 MoU target of Rs52 bn for to qualify
for an ‘Excellent’ rating —it reported standalone revenues of Rs51.8 bn in FY2010.
Estimates imply moderate revenue growth, strong margin expansion in rem. 9M
We have built in standalone revenues of about Rs57 bn in FY2011E with an EBITDA margin
of 17.4%. Our full-year estimates imply revenue growth requirement of 34% in 4QFY11E.
The estimates also imply strong EBITDA margin of 27.2% in 4QFY11E versus 9.5% in
4QFY10. However, note that 4QFY10 margins were primarily impacted by higher employee
costs, 21.7% of sales versus 8.5% in 4QFY09, led by provision for wage revision for
employees.
Target revenues of Rs100 bn by FY2013E seem aggressive
The management cited its target to achieve revenues of Rs100 bn by FY2013E implying very
high growth requirement of 23% CAGR over FY2010-13E. The management expects the
revenue growth to be driven by the systems segment and expects the systems share to total
revenue to increase to 50% in FY2013E from present levels of about 30% in FY2010.
Note that the company had earlier set the Rs100 bn revenue target for FY2012E and has
postponed this by a year. Furthermore, the company has historically grown at an average
rate of only about 10-13% — recorded 11% revenue CAGR over the past seven years
(FY2003-10).
Retain earnings estimates; reiterate REDUCE with a target price of Rs1,800
We have retained our earnings estimates of Rs106 and Rs120 for FY2011E and FY2012E
respectively and our 15X March-12E earnings based target price of Rs1,800/share. We
reiterate our REDUCE rating on the stock based on (1) potential long-term increase in
competition given that several firms may be awarded the Raksha Udyog Ratna status, (2)
likelihood that BEL would miss large part of offset related upside as that may be dominated
by private sector manufacturing and design companies such as L&T etc. (3) lack of publicly
available data points/news flows to justify more optimism, (4) potential margin dilution led
by higher proportion of order inflows/ revenues from system integration orders and (5)
infrequent investor communication and disclosures.
We maintain our view that as the economic outlook improves the stock is likely to
underperform as its business is independent of business cycles and is more attractive when
outlook on broad economy is weaker.
Key upside risks arise from (1) new initiatives in naval and nuclear areas, (2) nondefense/
offset-related orders, (3) strong execution over the next few quarters and (4) betterthan-
expected margins.
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