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Bharat Electronics (BHE)
Industrials
FY2011 AGM: Business as usual, some useful data points. BEL is confident of nearterm
execution based on its progress in execution FY2011 large orders and highlighted
incremental ordering (possibly Rs77 bn in FY2012 plus Rs50 bn already won). Key
points: (1) some caution about margins based on higher project share competition
(though we do not see order wins for the private sector in defense), (2) Rs100 bn sales
target pushed to 2015E (18% CAGR) and (3) 12-14% EBITDA CAGR possible as
revenues double and margins contract 200-300 bps over the next four years. Retain
ADD.
Confident of near-term execution; Rs100 bn sales target pushed to 2015 in line with estimates
The company appeared confident of achieving its FY2012E MOU target of Rs62 bn on (1) large
backlog (Rs236 bn at end-Mar-11 and Rs260 bn at August-end), (2) strong incremental ordering
expectations (Rs77 bn for 2HFY12) and (3) execution progress on new orders in FY2011. However,
it has pushed the Rs100 bn FY2013E sales target by two years (18% CAGR), which is not
surprising as we build in Rs74 bn as FY2013E sales. BEL also recounted execution issues of
customer acceptance of deliveries etc.
Cautious on margins: higher competition (no news of order wins for private sector), project share
The company highlighted intensifying competition (Tata, Mahindra and others seem to be
increasing investments in defense). We remain doubtful of much private sector impact as there
have been no big orders in favor of the private sector from defense recently, going by public data.
The contribution margin may decline on higher project share (65% in future versus 35%). We
expect the decline in margin to be mitigated by operating leverage gains as projects business
scales up. A potential doubling of sales with 200 bps EBITDA margin fall (8-10% at contribution
level) over FY2011-15E would still imply a 12-13% CAGR in EBITDA. We note that FY2011
margins remained stable at 16% even though large system orders such as Akash, Rohini and
Shakti have contributed about half of FY2011 revenues.
Shares order-wise execution (large orders have impressive execution), revenue mix, incr. orders
1/3 of FY2011 large orders executed. The company listed Rs106 bn of FY2011 orders (Rs84
bn from Akash, Rohini radar and Shakti orders), of which about Rs40 bn was executed in
FY2011 - including from large orders. This validates near-term execution targets.
Rs77 bn incremental orders likely. The company provided details of Rs77 bn worth of
incremental orders that may come in over the next few months
Shares revenue mix - radars contributed 25% of annual business. BEL shared breakup
of FY2011 revenues which reveals that radars contributed 25% of business in FY2011.
August-end backlog is Rs260 bn versus Rs236 bn at March-end. BEL shared that
order backlog at the end of August 2011-end stands at Rs260 bn versus Rs236 bn at the
end of March, 2011.
Debtor days improve by 68 days. The company cited that end-2011 debtor days (192)
suffered from Rs4 bn impact from delay on Coastal Surveillance order and has corrected
since then. This may have improved working capital further which was already –ve 149
days of sales.
Foreign technology providers (22% of business) demand JV. BEL indicated foreign
technology developers now ask for JVs and not just order share as earlier. In the attempt
to win half the order rather than none, BEL may eventually agree to such tie-ups.
Reiterate ADD on acyclical demand, attractive valuations; caution on execution,
lack of data points
We retain our estimates and reiterate ADD (TP:Rs1,875) on (1) acyclical and growing defense
spending, (2) attractive valuations (11XFY2013E), (3) strong cash position (Rs800/share -
Rs360/share even assuming 100 days of normative working capital) as well as incremental
cash generation characteristics (negative working capital and marginal capex), (4) large
unexecuted backlog (Rs260 bn as of end-Aug-11), and (4) potential scale up of project
business opportunity. Risks originate from near-term execution issues leading to negative
earnings surprise and lack of publicly available data points.
Our FY2013E estimates build in almost 400 bps contribution margin drop and 80 bps
EBITDA margins drop as employee and other expenses provide operating leverage on
growing revenues (16% yoy growth in both FY2012E and FY2013E).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharat Electronics (BHE)
Industrials
FY2011 AGM: Business as usual, some useful data points. BEL is confident of nearterm
execution based on its progress in execution FY2011 large orders and highlighted
incremental ordering (possibly Rs77 bn in FY2012 plus Rs50 bn already won). Key
points: (1) some caution about margins based on higher project share competition
(though we do not see order wins for the private sector in defense), (2) Rs100 bn sales
target pushed to 2015E (18% CAGR) and (3) 12-14% EBITDA CAGR possible as
revenues double and margins contract 200-300 bps over the next four years. Retain
ADD.
Confident of near-term execution; Rs100 bn sales target pushed to 2015 in line with estimates
The company appeared confident of achieving its FY2012E MOU target of Rs62 bn on (1) large
backlog (Rs236 bn at end-Mar-11 and Rs260 bn at August-end), (2) strong incremental ordering
expectations (Rs77 bn for 2HFY12) and (3) execution progress on new orders in FY2011. However,
it has pushed the Rs100 bn FY2013E sales target by two years (18% CAGR), which is not
surprising as we build in Rs74 bn as FY2013E sales. BEL also recounted execution issues of
customer acceptance of deliveries etc.
Cautious on margins: higher competition (no news of order wins for private sector), project share
The company highlighted intensifying competition (Tata, Mahindra and others seem to be
increasing investments in defense). We remain doubtful of much private sector impact as there
have been no big orders in favor of the private sector from defense recently, going by public data.
The contribution margin may decline on higher project share (65% in future versus 35%). We
expect the decline in margin to be mitigated by operating leverage gains as projects business
scales up. A potential doubling of sales with 200 bps EBITDA margin fall (8-10% at contribution
level) over FY2011-15E would still imply a 12-13% CAGR in EBITDA. We note that FY2011
margins remained stable at 16% even though large system orders such as Akash, Rohini and
Shakti have contributed about half of FY2011 revenues.
Shares order-wise execution (large orders have impressive execution), revenue mix, incr. orders
1/3 of FY2011 large orders executed. The company listed Rs106 bn of FY2011 orders (Rs84
bn from Akash, Rohini radar and Shakti orders), of which about Rs40 bn was executed in
FY2011 - including from large orders. This validates near-term execution targets.
Rs77 bn incremental orders likely. The company provided details of Rs77 bn worth of
incremental orders that may come in over the next few months
Shares revenue mix - radars contributed 25% of annual business. BEL shared breakup
of FY2011 revenues which reveals that radars contributed 25% of business in FY2011.
August-end backlog is Rs260 bn versus Rs236 bn at March-end. BEL shared that
order backlog at the end of August 2011-end stands at Rs260 bn versus Rs236 bn at the
end of March, 2011.
Debtor days improve by 68 days. The company cited that end-2011 debtor days (192)
suffered from Rs4 bn impact from delay on Coastal Surveillance order and has corrected
since then. This may have improved working capital further which was already –ve 149
days of sales.
Foreign technology providers (22% of business) demand JV. BEL indicated foreign
technology developers now ask for JVs and not just order share as earlier. In the attempt
to win half the order rather than none, BEL may eventually agree to such tie-ups.
Reiterate ADD on acyclical demand, attractive valuations; caution on execution,
lack of data points
We retain our estimates and reiterate ADD (TP:Rs1,875) on (1) acyclical and growing defense
spending, (2) attractive valuations (11XFY2013E), (3) strong cash position (Rs800/share -
Rs360/share even assuming 100 days of normative working capital) as well as incremental
cash generation characteristics (negative working capital and marginal capex), (4) large
unexecuted backlog (Rs260 bn as of end-Aug-11), and (4) potential scale up of project
business opportunity. Risks originate from near-term execution issues leading to negative
earnings surprise and lack of publicly available data points.
Our FY2013E estimates build in almost 400 bps contribution margin drop and 80 bps
EBITDA margins drop as employee and other expenses provide operating leverage on
growing revenues (16% yoy growth in both FY2012E and FY2013E).
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