Bharat Electronics (BHE IN, INR 1,258, Buy)
We recently met the top management of Bharat Electronics (BEL) to gain insights into the company’s business and its plans going ahead. Following are the key highlights of our interaction
Project sales to drive 10-12% revenue CAGR over FY12-14E
BEL expects FY12-14E revenue surge to be driven by project sales, especially of Akash Systems (For Air Force & Army), battlefield surveillance systems etc. The company is scheduled to conclude deliveries of Akash Systems by FY16E, for which major execution is planned FY14E onwards, during which it is expected to deliver higher value addition (radars, ground equipment & control systems).
Higher proportion of value addition to boost FY14E margins
From a historical EBIDTA margin of 20%, BEL expects to maintain a steady state margin of 11-12% over FY13E-14E, given the 30:70 mix of products and projects in revenue against the historical mix of 70:30, respectively (three year average basis).
Hiking R&D spend; rising competition a challenge going ahead
BEL has historically incurred 7-8% of sales on R&D towards various sub-system development and indigenisation. It is planning to hike the spend to sustain a superior profitability profile. Also, the competitive intensity has heightened for the company off late with the L&T consortium submitting bids for large technical communication system projects worth INR100bn. However, we believe, it is unlikely that the entire project will be awarded to a single vendor for strategic reasons.
Outlook and valuations: Positive; maintain ‘BUY’
Given the steady state growth in domestic defense spending over the medium to long term and BEL’s current positioning as a preferred domestic vendor, it remains the best play on the Indian defence market. With positive medium-term earnings growth outlook, we expect private sector participation in defence to be more of a long-term threat. BEL currently trades at PE of 11.5 x and 9.6x on FY13E and F14E earnings, respectively. We maintain ‘BUY/Sector Outperformer’ with TP of INR 1610.
Regards,
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