Bharat Electronics’ (BEL) margin posted a spectacular comeback,
catapulting 200bps YoY in Q3FY13; though margin surpassed Street
estimate, it belied our expectation. While Q3FY13 and 9mFY13 revenue
was weak, management believes volume recovery in Q4FY13 will be
strong enough to meet its FY13 revenue guidance. We believe the
company is on course to meet its revenue and order intake guidance, and
could surprise the Street with a strong margin recovery owing to healthy
operating leverage in the coming quarters. Maintain ‘BUY’.
Volume recovery ahead; FY13 order, revenue guidance maintained
BEL’s Q3FY13 revenue growth was flattish YoY and 9mFY13 sales declined 4% led by
back‐ended revenue. However, armed with the confidence that most FY13 deliveries
will reflect in Q4FY13 numbers, management reiterated FY13 order intake and revenue
guidance. BEL is yet to see any material order intake and believes majority of it will be
skewed towards Q4FY13.
FY14‐15: Finding a foothold; margin to stabilise
We believe BEL’s business transformation from a pure product supplier to a defence
aggregator and integrator will stabilise over FY13‐15. The company will be a key
supplier of EW systems, radars and network‐based systems, where large‐value turnkey
systems are becoming a sustainable trend. As the company will deliver large‐value
Akash Missile systems (Air Force + Army versions) during FY14‐15, we expect margin to
stabilise at 11.5‐12.3%, which is indicative of its long‐term margin.
Outlook and valuations: Positive; maintain ‘BUY’
We perceive BEL to be a lead defence supplier over the next three‐five years, despite
rising interest from private sector players, given its focused positioning in core areas
like missile systems, radars etc. We maintain finalisation of JVs will be key value driver
over the next three‐five quarters. We maintain ’BUY/Sector Outperformer’
recommendation/rating with a target price of INR1,610, discounting FY14E earnings at
12.3x (10% discount to historical PE). The stock currently trades at a P/E of 12.0x & 9.5x
its FY13E & FY14E earnings respectively. We further introduce our FY15E numbers
through this update.
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