Bharat Electronics - Another weak performance, but FY13 outlook better; company update; Buy :: Edelweiss PDF link

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Bharat Electronics (BHE IN, INR 1,519, Buy)

Bharat Electronics (BEL) reported provisional results for FY12 with turnover of INR57bn (our estimate INR60.5bn; management guidance INR62bn) and PBT of INR9.75bn (our estimate INR 10.9bn). Management has cited delays in customer clearances as reason for the miss. FY13 outlook is better with expectations of close to 20% sales growth and improvement in EBIDTA margin. BEL remains a good defensive play with cash of more than INR700/ share on balance sheet. We maintain ‘BUY’.

Sales drop, margins disappoint again in 4Q

Q4FY12 sales stand at INR22.4bn, down 5% YoY. We estimate (based on provisional PBT numbers) that BEL earned EBIDTA margin of only 12.4% in the quarter versus 24.6% in Q4FY11. This decline was sharper than in 9mFY12 when margins were down 590bps YoY. Key reasons for the margin disappointment were inferior product mix (traded products e.g., Akash weapons, lower margin tablet PCs etc.), salary arrears, weak INR (100bps) and operating leverage. Order inflows were at INR80bn versus guidance of INR100bn for the full year.  

Management guides for a better FY13

Management expects to achieve sales of INR70bn in FY13E, implying 23% YoY growth, given strong order backlog of INR259bn (4.5x FY12 sales). We maintain our forecast of INR68bn sales for now. Also, management expects EBIDTA margin to rebound to 13-14% in FY13E (we forecast 12.5%) from 9.2% in FY12. Further, the company is targeting an order inflow of INR 100bn in FY13.

Outlook and valuations: A defensive bet; maintain ‘BUY’

BEL is trading at 13.6x FY13E and 12.7x FY14E earnings. We believe this is inexpensive given the cash of more than INR700/share. On core earnings (ex-cash), the stock is trading at 11.9x FY13E. Our TP of INR1,700/share is based on 15x FY13E earnings.

Bharat Electronics - Another weak performance, but FY13 outlook better; company update; Buy

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