Bharat Electronics rating – Buy: FY21 performance impressed again

Bharat Electronics (BEL) continues to impress with a 9% y-o-y topline growth and 150bps y-o-y standalone Ebitda margin expansion for FY21 – a year with a near lost Q1FY21 (revenues declined 20% y-o-y in Q1FY21) on account of the pandemic. There has been a working capital release of Rs 23 bn for FY21, driven by Rs 28 bn of H2FY21 working capital release – another remarkable statistic. To add to the achievements, order acquired has been Rs 152 bn (~Rs 54 bn for Q4FY21), thereby maintaining a healthy book to bill of 3.9x on FY21e (standalone) topline of ~ Rs 140 bn. BEL’s performance continues to stand out (execution + margin + orderbook visibility) within listed DPSU space. We continue to maintain Buy with a revised target price of Rs 177 (Rs 153 earlier).

FY21 order inflow at Rs 152 bn: The FY22 order pipeline is also quite visible with ~Rs 125 bn of missile orders to BDL and Rs 380 bn of LCA Mk1A orders to HAL. Q4FY21 witnessed Rs 10 bn of order inflow from Software defined radio (tactical) for Indian Navy. The opportunity from SDR is also significant with BEL already supplying SDR (Naval combat) version and SDR-Air being under evaluation.

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. Future opportunities include Jammer for LCA. Also, LUH and LCH (helicopters) may allow sensors and weapons to significantly augment BEL’s avionics revenue.

Onus will be on diversification and execution: BEL targets: (i) civilian segment to increase from 7% of topline to 15% in the next 2- 3 years; (ii) to increase the current 10% revenue contribution from service sector; (iii) capture a pie of the revenue expenditure budget of the Armed Forces via entry into electronic fuses and RF seekers (new complex in Machilipatnam to be commissioned soon); and (iv) gain share in the base business, i.e. integration of missile complex (Palasamudram; another separate SBU for QRSAM in Bengaluru), entry into ammunition, etc. Diversification away from defence business is key to achieve medium-term visibility on double-digit revenue growth.

Maintain BUY: We value BEL at 17x FY23e earnings (vs 15x FY22e earlier). We maintain Buy with a revised TP of Rs 177/share. BEL continues to surprise on execution, margins, order inflow, growth despite reaching a commendable scale (compared to Indian defence budget) – FY21 performance highlights the strength of underlying business model.