Growth trajectory remains strong for defence major Bharat Electronics

Healthy order book, tender pipeline and margin improvement are positives

The stock of defence major Bharat Electronics (BEL) was up 3.7 per cent on Monday and hit a fresh 52-week high. The gains came after a strong June quarter or the first quarter of 2022-23 financial year (Q1FY23) performance and expectations of a robust growth trajectory going ahead. In addition to revenue visibility in core defence business, scaling up of new segments and margin expansion are key positives.

On a favourable base and amid multiple headwinds, BEL delivered a 96 per cent year-on-year (YoY) growth in sales in Q1FY23 to Rs 3,063 crore. This was better than Street estimates which had pegged it at around the Rs 2,000-crore mark. The company has been facing execution challenges due to the Russia-Ukraine crisis and the disruption in supply of semiconductors. This had hit its performance in the March quarter with sales falling 9 per cent YoY.

While order inflow in the June quarter was below the Street expectation, the overall order book and pipeline remains healthy. Orders in the quarter stood at Rs 830 crore and were down 67 per cent over Q1FY22. Half of the order inflow in the quarter was for six weapon locating radars by the Indian Army.

However, the order book, which stands at Rs 55,333 crore, is about 3.5 times its FY22 sales of Rs 15,392 crore and offers good revenue visibility. Given the strong tender pipeline, the company is headed for an order inflow of Rs 20,000 crore for FY23.

Improvement in operating profit margins is another trigger. BEL reported margins of 16.6 per cent in Q1FY23 as compared to 4.2 per cent in Q1FY22. The same was on strong revenue growth and better absorption of fixed costs, according to Prabhudas Lilladher Research. Margins for FY23 are expected to be in the 20-22 per cent range.

The key contributors of gross margin increase, according to JM Financial, are increased indigenisation in projects like LRSAM (surface to air missile) and smart cities, scale benefits in electoral voting machines (EVMs) and a better sales mix (doubling of exports).

Increase in non-defence orders from the current 12 per cent to 20 per cent in the medium-term could diversify its revenue base and reduce risk. In addition to metro rail, other non-defence segments are auto, space electronics, unmanned systems and medical electronics.

Arafat Saiyed of Reliance Securities, who has a ‘buy’ rating on the stock. believes that a debt-free balance sheet, efficient working capital management, adequate research and development spend, timely execution, strong cash flow and prudent capital allocation augurs well for the stock.