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Bharat Electronics (BHE)
Industrials
Holding on to hope for next quarter. BEL reported a weak quarter with (1) flat sales
(Rs9.2 bn versus Rs10.6 bn estimate) and (2) 540 bps margin contraction (higher raw
material, employee cost as percent of sales). High other income (Rs1.6 bn versus Rs0.6
mn last year) led to PAT beat (Rs1.2 bn versus Rs0.9 mn estimate, up 51% yoy). The
company reiterated Rs62 bn FY2012E sales target. It cited margins to normalize going
forward (low value-added orders executed in IQ, low base for employee cost).
Marginally revise TP to Rs1,825.
Weak operating performance: Flat sales and sharp margin decline; PAT beat on high other income
BEL reported disappointing 1QFY12 revenues of Rs9.2 bn, relatively flat on a yoy basis (from
Rs9.13 bn in 1QFY11) and about 13% below our estimate of Rs10.6 bn. The company reported a
yoy contraction in EBITDA margin of 540 bps (3.9%) versus our estimate of 110 bps margin
expansion (10%). This was primarily led by (1) higher raw material cost as percent of sales
(contribution margin declining to 38.9% versus 41.3%) and (2) higher employee cost as percent of
sales (29.2% versus 26.2%). High other income (Rs1.6 bn versus Rs616 mn) led to a net PAT of
Rs1.2 bn (up 51% yoy) and significantly (about 36%) ahead of our estimate of Rs902 mn
Management reiterates sales target, guides for normalization of margins going forward
The company reiterated its FY2012E revenue target of Rs62 bn (12% yoy growth). It has also
guided for normalization of margins as decline in 1Q was led by timing issues.
Execution of low value-added orders led to contribution margin decline. The company
highlighted that lower contribution margin for the quarter (38.9% versus 41.3% last year) was
led by change in business mix as it executed higher proportion of low value-added orders.
Lower base in 1Q last year fueling yoy growth; full-year employee cost to be stable. The
company also cited certain provisions not taken in 1QFY11 (pushed to 2Q) as part of employee
cost which optically enhances growth in employee cost (16.3%). It guided for lower single digit
growth in employee cost for the full year as this anomaly reverses in 2Q.
Revise estimates; retain ADD rating; execution is key risk as backlog grows without topline impact
We revise estimates to Rs117.5 and Rs129.8 from Rs121 and Rs134 for FY2012E and FY2013E
based on lower execution assumption. Retain ADD (TP of Rs1,825 based on 14X FY2013E versus
Rs1,850 earlier) on (1) relatively immunity to capex, GDP and interest rate cycle and (2) strong
backlog providing revenue visibility.
Key risks include (1) execution uncertainty and (2) potential margin drop in system orders.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Electronics (BHE)
Industrials
Holding on to hope for next quarter. BEL reported a weak quarter with (1) flat sales
(Rs9.2 bn versus Rs10.6 bn estimate) and (2) 540 bps margin contraction (higher raw
material, employee cost as percent of sales). High other income (Rs1.6 bn versus Rs0.6
mn last year) led to PAT beat (Rs1.2 bn versus Rs0.9 mn estimate, up 51% yoy). The
company reiterated Rs62 bn FY2012E sales target. It cited margins to normalize going
forward (low value-added orders executed in IQ, low base for employee cost).
Marginally revise TP to Rs1,825.
Weak operating performance: Flat sales and sharp margin decline; PAT beat on high other income
BEL reported disappointing 1QFY12 revenues of Rs9.2 bn, relatively flat on a yoy basis (from
Rs9.13 bn in 1QFY11) and about 13% below our estimate of Rs10.6 bn. The company reported a
yoy contraction in EBITDA margin of 540 bps (3.9%) versus our estimate of 110 bps margin
expansion (10%). This was primarily led by (1) higher raw material cost as percent of sales
(contribution margin declining to 38.9% versus 41.3%) and (2) higher employee cost as percent of
sales (29.2% versus 26.2%). High other income (Rs1.6 bn versus Rs616 mn) led to a net PAT of
Rs1.2 bn (up 51% yoy) and significantly (about 36%) ahead of our estimate of Rs902 mn
Management reiterates sales target, guides for normalization of margins going forward
The company reiterated its FY2012E revenue target of Rs62 bn (12% yoy growth). It has also
guided for normalization of margins as decline in 1Q was led by timing issues.
Execution of low value-added orders led to contribution margin decline. The company
highlighted that lower contribution margin for the quarter (38.9% versus 41.3% last year) was
led by change in business mix as it executed higher proportion of low value-added orders.
Lower base in 1Q last year fueling yoy growth; full-year employee cost to be stable. The
company also cited certain provisions not taken in 1QFY11 (pushed to 2Q) as part of employee
cost which optically enhances growth in employee cost (16.3%). It guided for lower single digit
growth in employee cost for the full year as this anomaly reverses in 2Q.
Revise estimates; retain ADD rating; execution is key risk as backlog grows without topline impact
We revise estimates to Rs117.5 and Rs129.8 from Rs121 and Rs134 for FY2012E and FY2013E
based on lower execution assumption. Retain ADD (TP of Rs1,825 based on 14X FY2013E versus
Rs1,850 earlier) on (1) relatively immunity to capex, GDP and interest rate cycle and (2) strong
backlog providing revenue visibility.
Key risks include (1) execution uncertainty and (2) potential margin drop in system orders.
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