Analysts remain bullish on Bharat Electronics despite weak Q1 numbers

Our Bureau Chennai | Updated on July 29, 2020

The PSU major on Tuesday posted revenues at ₹1,671 crore, a decline of 20.5 per cent year-on year   -  Bloomberg

Defence major may breathe easy due to ventilator business, healthy orders, say analysts

Shares of Bharat Electronics jumped to ₹100.15 in early deal on Wednesday as analysts remain positive on the company’s propsects despite it posting a weak set of numbers for the first quarter of the current fiscal.

The BEL stock, however, surrendered most of the gains in the afternoon session, and it currently rules at ₹97.45 against the previous day’s close of ₹97.15, due to an overall weak market sentiment.

The PSU major on Tuesday posted revenues at ₹1,671 crore, a decline of 20.5 per cent year-on year, on the back of supply-chain disruption affecting execution. The net profits declined 74 per cent to ₹54 crore (₹205 crore).

According to analysts, BEL’s ventilator business and order flows will give it new strength.

The current valuations assume the negative impact of Covid-19 on defence spending in FY21 but do not price in any major order inflows as an offshoot from the recent geopolitical issues. The stock currently trades at 11.5x PE FY22, materially lower than its long-term average of 16x, said PhillipCapital, which maintained a buy rating on the stock with a target price of ₹130.

Another quarter and another investor concern was allayed, as profitability on the ventilator order was much higher than the expectations. In addition, BEL managed its new working capital despite a weak operating environment. “We raise our FY21 estimates as we incorporate higher margins for the ventilator project and keep our FY22 estimates unchanged,” it added.

While most private sector industrials/defence players have been compelled to revamp cost/factory structure due to low business volumes, BEL’s challenge and focus are tackling rising quantum of complex and much large systems integration, which is a healthy conundrum, said Edelweiss Securities.

“We remain confident of strong growth/returns potential with solid FCF given improving integration capabilities, improving demand for systems upkeep, etc,” added Edelweiss, while maintaining its buy rating with a target price of ₹110.

Major orders received during the quarter were for ventilators, advanced torpedo defence systems and smart city projects, said Motilal Oswal Financial. “We have increased our target price from ₹108 to ₹116 (14x FY22E EPS, below its long-term trading multiple of 16x),” it added while retaining the buy recommendation.

ICICIdirect, however, retained its ‘hold’ rating on the stock, saying: “Overall, execution is expected to remain stable for FY21 while order inflows may get impacted in the medium term due to a delay or deferral in a few projects. BEL is likely to continue its focus to increase contribution from non-defence segment that may contribute approximately 20 per cent to revenue, albeit with lower margins in the next three to five years.”

Published on July 29, 2020

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