Bharat Electronics - Commendable execution in a tough environment - ICICI Securities

Bharat Electronics' (BEL) potential FY21E topline and order inflow remain at >Rs140bn and Rs150bn respectively. Order inflow expectations comprise: i) Rs100bn of probable Akash missile (Army) order to Bharat Dynamics (BDL) will have ~60% of order value accruing to BEL; ii) similarly, ~Rs25bn of Astra missile order to BDL will ensure that 30-40% accrues to BEL; iii) ~Rs370bn of LCA Tejas order to Hindustan Aeronautics (HAL) can see ~Rs35bn of order value coming to BEL; and iv) electronic warfare orders. Q2FY21 witnessed ~Rs15.6bn worth of order inflow, comprising of Advanced Composite Communication Systems, EW, Naval fire control system and 3D surveillance radar. Q2FY21 execution bump was driven by supply of ventilators. Working capital remains somewhat stretched. Upgrade to HOLD with a revised target price of Rs95 (earlier: Rs85).

- Q2FY21 crossed expectations. Revenues grew 19% YoY while EBITDA was up 14%. With strong execution in Q2, the topline for H1FY21 grew 1.8% YoY. The spurt in Q2FY21 execution appears to have been driven by supply of ventilators. BEL did receive ~Rs12bn worth of ventilator orders in Q1FY21. Also, part of the increased revenue came from pent-up or delayed execution from Q1FY21 (~Rs5bn-6bn). Gross margins appear normalised given the order mix (which includes Smart City projects)

- FY21E guidance on execution and order inflow strong. The FY21E order pipeline is quite visible with ~Rs125bn of missile orders to BDL and Rs370bn of LCA Mk1A orders to HAL. These two orders alone can generate Rs100bn-110bn of inflow for BEL. Add to that the Rs55bn worth of order inflow already achieved in H1FY21 - and the guidance appears quite reasonable. Execution size of Rs140bn and above is the tricky one to repose faith in - aided by Rs12bn worth of ventilators, Akash squadrons for Air Force (received last year, LRSAM, Smart City orders worth Rs10bn), etc.

- Cashflow remains an area of concern in FY21E and may impact execution. While order inflow may sustain, cashflow remains an area of concern. H1FY21 witnessed ~Rs10bn of working capital outflow (excluding other financial liabilities, which we feel has been augmented as a source of financing). There is a real risk of BEL turning into a net debt company. Undue increase in receivables may force the company to slow down execution. Also, continued reliance on imports (Rafale, P8I, Mig 29K, Su-30 - and the list keeps growing - for FY21E) can make the cashflow situation more difficult for defence PSUs by H2FY21-end.

- Upgrade to HOLD from Reduce. H1FY21 performance was better than expected, driven by a revenue bulge from execution in ventilators. The same has been factored into our estimates. Slowdown in H2FY21 order inflows or further deterioration in working capital are the key downside risks to our call. We value BEL at 13x FY22E earnings (vs 15x earlier).

Shares of BHARAT ELECTRONICS LTD. was last trading in BSE at Rs.96.65 as compared to the previous close of Rs. 96.65. The total number of shares traded during the day was 81620 in over 659 trades.

The stock hit an intraday high of Rs. 97.4 and intraday low of 96.35. The net turnover during the day was Rs. 7898001.

Source : Equity Bulls

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