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Bharat Electronics - Diversifying into multiple revenue streams - ICICI Securities

Posted On: 2020-11-19 21:56:15


Strategy to diversify revenue streams away from a constrained domestic defence budget - was a key takeaway from Bharat Electronics' (BEL) analyst meet. BEL does not mind additional capex to achieve the same (10-15% YoY capex growth p.a. from the likely Rs5.5bn in FY21). The idea, if properly executed, can allow BEL to maintain double-digit revenue growth in the foreseeable future; it also underlines the limited headroom the base business offers for continuation of growth, given scale. Maintain HOLD with a revised target price of Rs102.

- Onus is on execution. BEL targets: i) civilian segment (including medical equipments) to move from 7% of topline to 15% in the next 2-3 years; ii) to increase the current 10% revenue contribution from service sector (including AMCs); iii) capture the revenue expenditure budget of the Armed Forces via entry into electronic fuses, RF seekers (new complex in Machilipatnam to be commissioned next year); and iv) gain share in the base business, i.e. integration of missile complex (Palasamudram; another separate SBU for QRSAM in Bengaluru), entry into ammunitions, etc.

- Key operational guidance. BEL hopes to manage double-digit topline growth in the foreseeable future. Order inflow for FY21 will certainly exceed FY20 inflow of Rs130bn (mentioned Rs150bn of possible inflow). Management hopes to maintain EBITDA margins of 20+/-1%even without any favourable policy review of cost-plus margins in nominated orders. Capex guidance for FY21 remains Rs5.5bn with a strong outlook to capture multiple opportunities. R&D spend has been finalised at 8-10% of profit, with an eye for return as tax benefits are no longer available.

- Near-term order opportunities. BEL has already accounted for execution of avionics related to LCA Mk 2, as HAL has received LoI for the same. Key elements of the avionics package for LCA Mk 2 include Fly by Wire Digital Flight Control Computer (DFCC). Future opportunities include Jammer for LCA. Also, LUH and LCH (helicopters) may allow BEL sensors (MAWS and counter-measure dispensers along with HMDS) and weapons to significantly augment BEL's avionics revenue. Yet, order inflow for FY21 seems dependent on the electronics orders from Akash squadrons that have accrued to BDL.

- Despite LRSAM execution and increasing % of nominated orders under revised margins, management expects to maintain ~20% EBITDA margin in FY21. LRSAM execution will begin in FY21 and the first four systems have limited (~40%) work share for BEL. Company has been able to indigenise majority of the work orders, thereby helping margin profile. To offset the possible weakness because of LRSAM execution, BEL will try to deliver the first Akash squadron in FY21. BEL will also be executing IACCS over next two years, the project has matured thereby yielding enhanced margins.

- Despite LRSAM execution and increasing % of nominated orders under revised margins, management expects to maintain ~20% EBITDA margin in FY21 (cont'd). ... To add to the margin tailwinds are annual maintenance contracts for Navy. New projects execution would also involve SDR for Army, Smart City projects (two have gone live), and electronic fuses.

- Future orders (base business) that BEL banks on. Management is particularly hopeful of QRSAM orders, which have gone for user trials post development. Orders can accrue after 18 months and the management expects ~Rs300bn of order inflows over next 10-12 years. IACCS phase-III too is expected to accrue; there are also export opportunities from the same. Management expects Akash NG (next-generation) and Akash with Seeker orders. BEL is targeting electro-optics as a major source of order inflow for the next few years. There is also an attempt to capture revenue expenditure of the Armed Forces through supply of RF and IR seekers and the new facility in Nimmaluru will cater to it.

Maintain HOLD

Maintain HOLD with a revised target price of Rs102/share. We value BEL at 14x FY22E EPS (vs 13x earlier). Any disappointment on the topline can significantly impact our valuation.

Being able to achieve/reach close to its targeted execution amidst moderating cashflow pressures is the bull case for BEL and the key risk to our HOLD call. Also, what causes concern is the extent of cashflow pressures - part of which can be observed from H1FY21 consolidated cashflows.

Shares of BHARAT ELECTRONICS LTD. was last trading in BSE at Rs.103.1 as compared to the previous close of Rs. 96.65. The total number of shares traded during the day was 3600151 in over 19576 trades.

The stock hit an intraday high of Rs. 107.55 and intraday low of 95.8. The net turnover during the day was Rs. 373506246.


Source: Equity Bulls

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