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Bharat Electronics (BHE)
Industrials
Advances lead cash chest; growth focus on R&D, JVs and diversifications.
Advances (25% of backlog) almost doubled on a spurt of new orders leading to Rs65
bn cash (Rs800/share). We are wary of valuing this fully as working capital is abnormally
negative (149 days). At a normative WCap of 100 days, cash would have been Rs29 bn
(360/share). The company’s growth strategy is pegged on R&D (7% of sales), JVs
(expected to contribute Rs20 bn revenues in 4/5 years) and diversification (UID project,
nuclear etc). We revise our estimates, retain ADD (TP1,875 versus Rs1,825 earlier).
Advances led working capital reduction and moderate capex lead to higher cash levels
BEL reported doubling of its advances (Rs64 bn from Rs35 bn last year) on higher inflows during
the year (advances as proportion of backlog in-line with historical average). The growth in
advances outpaced the increase in debtors, leading to negative working capital of Rs22 bn
(negative 149 days of sales. Stagnant capex levels (Rs1.1 bn in FY2011, flat yoy) led to free cash
flow of Rs32 bn (12 bn last year). We highlight the negative working capital (excluding cash) over
FY2004-07 and again in FY2011, implying a drain on cash from the system. At a normative
working capital of 100 days of sales, cash balance would have been Rs29 bn (Rs360/share).
R&D expense increases to 7% of sales; share of organic technologies to sales remains stagnant
R&D expenditure continued to increase as a percentage of sales (7% from 6% last year, 3.6% in
FY2007). This may have long-term benefits, in the near term however, turnover from in-house
technologies remained flat yoy at 57% in FY2011 (54% in FY2009). The company cited its threeyear
plan to augment its R& D capabilities (enhancing resources and budgets) and highlighted the
launch of more than 35 new products (defence, integrated communication systems).
Expects Rs20 bn in 4/5 years from new ventures; 20% headcount reduction even as sales trebled
BEL expects an additional Rs20 bn p.a. from new ventures (optical networking systems, offset
expansion, solar, radars). Other key takeaways (1) 20% headcount reduction over 10 years even as
sales have broadly trebled and (2) GE BE a 26% associate contributed (sales of Rs1.2 bn and PAT
of Rs0.15 bn (about Rs2/share), while BEL Optronics has sales of Rs0.52 bn with PAT of Rs40 mn.
Revise estimates on high cash levels (interest income) and marginally lower execution
We revise our estimates to Rs121, 135 from Rs117.5, Rs130 for FY2012E, FY2013E on (1)
increased interest income (higher cash levels) and (2) marginally lower execution assumptions.
We retain our ADD rating on (1) relatively immunity to capex, GDP and interest rate cycle and
(2) strong revenue visibility, (3) free cash and cash flows and (4) attractive valuations of 12XFY13E.
Steep decline in working capital as advances increase on higher backlog
BEL reported a steep decline in working capital as advances from customers almost doubled
to Rs64 bn (standalone) versus Rs35 bn last year. We highlight that such an increase in
advances paid is due to the sudden spurt in ordering activity. This optically reduces the days
of sales of working capital from five to negative 149 (standalone). We expect debtors days
to catch up with the increase in backlog and for working capital to stabilize.
Debtor days have increased to 192 from 152 at the end of last year due to pending
performance guarantee and budgetary constraints of BEL’s clients. Advances increased to
425 days of sales (245 last year accounting for about 27% of the backlog, in line with
average over FY2007-10 (26.5%).
Operating cash increases sharply on negative working capital
BEL reported operating cash flows of Rs33 bn in FY2011 (Rs13 bn last year). The increase
was primarily led by the sharp increase in advances leading to negative working capital.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Electronics (BHE)
Industrials
Advances lead cash chest; growth focus on R&D, JVs and diversifications.
Advances (25% of backlog) almost doubled on a spurt of new orders leading to Rs65
bn cash (Rs800/share). We are wary of valuing this fully as working capital is abnormally
negative (149 days). At a normative WCap of 100 days, cash would have been Rs29 bn
(360/share). The company’s growth strategy is pegged on R&D (7% of sales), JVs
(expected to contribute Rs20 bn revenues in 4/5 years) and diversification (UID project,
nuclear etc). We revise our estimates, retain ADD (TP1,875 versus Rs1,825 earlier).
Advances led working capital reduction and moderate capex lead to higher cash levels
BEL reported doubling of its advances (Rs64 bn from Rs35 bn last year) on higher inflows during
the year (advances as proportion of backlog in-line with historical average). The growth in
advances outpaced the increase in debtors, leading to negative working capital of Rs22 bn
(negative 149 days of sales. Stagnant capex levels (Rs1.1 bn in FY2011, flat yoy) led to free cash
flow of Rs32 bn (12 bn last year). We highlight the negative working capital (excluding cash) over
FY2004-07 and again in FY2011, implying a drain on cash from the system. At a normative
working capital of 100 days of sales, cash balance would have been Rs29 bn (Rs360/share).
R&D expense increases to 7% of sales; share of organic technologies to sales remains stagnant
R&D expenditure continued to increase as a percentage of sales (7% from 6% last year, 3.6% in
FY2007). This may have long-term benefits, in the near term however, turnover from in-house
technologies remained flat yoy at 57% in FY2011 (54% in FY2009). The company cited its threeyear
plan to augment its R& D capabilities (enhancing resources and budgets) and highlighted the
launch of more than 35 new products (defence, integrated communication systems).
Expects Rs20 bn in 4/5 years from new ventures; 20% headcount reduction even as sales trebled
BEL expects an additional Rs20 bn p.a. from new ventures (optical networking systems, offset
expansion, solar, radars). Other key takeaways (1) 20% headcount reduction over 10 years even as
sales have broadly trebled and (2) GE BE a 26% associate contributed (sales of Rs1.2 bn and PAT
of Rs0.15 bn (about Rs2/share), while BEL Optronics has sales of Rs0.52 bn with PAT of Rs40 mn.
Revise estimates on high cash levels (interest income) and marginally lower execution
We revise our estimates to Rs121, 135 from Rs117.5, Rs130 for FY2012E, FY2013E on (1)
increased interest income (higher cash levels) and (2) marginally lower execution assumptions.
We retain our ADD rating on (1) relatively immunity to capex, GDP and interest rate cycle and
(2) strong revenue visibility, (3) free cash and cash flows and (4) attractive valuations of 12XFY13E.
Steep decline in working capital as advances increase on higher backlog
BEL reported a steep decline in working capital as advances from customers almost doubled
to Rs64 bn (standalone) versus Rs35 bn last year. We highlight that such an increase in
advances paid is due to the sudden spurt in ordering activity. This optically reduces the days
of sales of working capital from five to negative 149 (standalone). We expect debtors days
to catch up with the increase in backlog and for working capital to stabilize.
Debtor days have increased to 192 from 152 at the end of last year due to pending
performance guarantee and budgetary constraints of BEL’s clients. Advances increased to
425 days of sales (245 last year accounting for about 27% of the backlog, in line with
average over FY2007-10 (26.5%).
Operating cash increases sharply on negative working capital
BEL reported operating cash flows of Rs33 bn in FY2011 (Rs13 bn last year). The increase
was primarily led by the sharp increase in advances leading to negative working capital.
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