Analyst Corner: Maintain ‘hold’ on Bharat Electronics with TP of Rs 102

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% y-o-y capex growth from the likely Rs 5.5 billion 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 Rs 102.

Onus is on execution. BEL targets civilian segment (including medical equipments) to move from 7% of topline to 15% in the next 2-3 years; to increase the current 10% revenue contribution from service sector (including AMCs); 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 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 Rs 130 billion (mentioned Rs 150 billion 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 Rs 5.5 billion 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.