Stock Fundamentals

Why you should hold the stock of Bharat Electronics

Maulik Madhu | Updated on February 27, 2021

Greater focus on domestic defence production should serve the company well

The government’s push for making India’s defence sector ‘Atmanirbhar’ is aimed at boosting the country’s manufacturing capability and reducing its dependence on imports. While this will infuse more competition from private players, the government-owned Bharat Electronics (BEL), a dominant supplier of electronic equipment to the defence sector, too should gain from greater focus on indigenisation.

Many positives

BEL clocked a healthy revenue and operating profit growth ( CAGR) of 13 per cent and 19 per cent, respectively, between FY15 and FY20. Impacted by the pandemic-related disruptions, the company posted a year-on-year 2.5 per cent growth in revenue and a 2.5 per cent fall in operating profit for the nine months ended December 2020.

BEL’s healthy order book of ₹54,791 crore as of January 1, 2021 too offers comfort on the revenue front. The company has no debt and net cash is at 5 per cent of its market cap. Aided by the government’s policy announcements on progressive indigenisation of defence manufacturing, and new orders, the stock of BEL has multiplied nearly 2.5 times since May 2020. At ₹137 per share, the stock discounts its FY22 estimated earnings (Bloomberg) by 16.5 times, just below its five-year average forward price-to-earnings multiple of 17 times.

Investors can continue holding the stock of BEL, given the company’s healthy order book and strong financials. Greater focus on domestic production in defence, the impact of which is expected to play out over the long run, should serve BEL well.

About the company

BEL, a defence PSU, is a key supplier of products such as radar and missile systems, communication and network centric systems, anti-submarine warfare and sonar systems, tank electronics, electro optic systems and electronic warfare and avionics systems to the Indian defence sector. Defence-related products accounted for 82 per cent of the company’s revenue in FY20. The other 18 per cent was from non-defence segments such as homeland security solutions and other civilian products.The company’s order book of ₹ 54,791 crore implies an order book to revenue ratio of 4.3 times based on FY20 revenues. This is broadly in line with the ratio over the last few years and offers future revenue visibility.

Healthy financials

BEL grew its income from operations 13 per cent (CAGR) to ₹12,968 crore between FY15 and FY20. During this period, the company’s operating profit rose 19 per cent to ₹ 2,754 crore. A downward revision in the government’s pricing impacted BEL’s profit margins from FY20 compared to the past. At an EBITDA margin of 21 per cent and net profit margin of 14 per cent, these were still good. According to BEL, it will be able to maintain operating profit margins at 19-20 per cent. Delays in order acquisition and delivery schedules in the post pandemic period, however impacted the company’s performance in the first nine months of FY21. BEL reported revenues of ₹7,191 crore (up 2.5 per cent y-o-y), EBITDA of ₹1,230 crore (down 2.5 per cent) and net profit of ₹ 731 crore (down 6 per cent) for nine months ended December 2020. Higher depreciation expense impacted net profit. The EBITDA and net profit margins came in at 17 per cent and 10 per cent, respectively for this period.

Industry tailwinds

The Government’s emphasis on ‘Make in India’ in defence is an opportunity that BEL can capitalise on given its strong position, though increasing competition from private sector players could pose a threat. The government has budgeted to spend 63 per cent of the capital outlay in the 2021-22 defence budget, that is, ₹70,221 crore on domestic defence procurement. It was for the first time in 2020-21 that the Government introduced a separate allocation (₹52,000 crore) for domestic procurement. BEL also stands to benefit from the import embargo on 101 items to be implemented progressively over the next few years until 2025. According to BEL, it is already producing 35 of these items. These contributed around 25 per cent of the company’s 2019-20 revenue. The Defence Ministry is expected to notify another import embargo list by next month.

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Published on February 27, 2021
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