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Defence orders, sticky margins to keep D-St interested in BEL

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ET Intelligence Group: Bharat Electronics (BEL), which makes radars, avionics, and naval systems for the Indian armed forces, has climbed about a fifth in just one month, and the reasons aren’t that hard to find.

Healthy order prospects for missiles and margin protection will likely keep investors interested in BEL, which expects FY20 revenue to climb about 12 per cent. The outstanding order book is Rs 57,600 crore, equivalent to four times FY19 revenue. In FY20, BEL has grabbed orders worth Rs 9,000 crore, with Akash missiles accounting for three-fifths of the total order inflow.

The company expects order intake of Rs 15,000 crore in FY20. Execution of the new long-range surface-to-air missile platform would be the next trigger for an upgrade.

However, it entails significant spending and trials.

Historically, BEL has been investing nearly 8.8-9 per cent of its revenue on R-D. In the medium term, BEL could benefit from sizeable prospective orders of medium range and Quick Reaction Surface-to-Air Missiles (QRSAM). The size of the QRSAM order could be in the range of Rs 30,000-40,000 crore.

In addition, orders for electronic warfare systems Himshakti, coastal surveillance systems and shallow-water craft for anti-submarine warfare could add Rs 5,000 crore to the pipeline. BEL is taking steps to increase value addition in the scope for work.

For instance, to make missiles future ready, it is offering solutions for on-board electronic device at Akash compared with ground-based radar technology used currently. The new technology offering will increase value addition to more than 60 per cent compared with 30 per cent in the current Akash order. BEL maintains average annual base order inflow of about Rs 8,000 crore.

This helps lower volatility in revenue and margin due to large orders such as Akash.

In addition, the company plans a more favourable mix of orders to enhance margins. BEL stock had fallen after the government cut mark-up margins for the nomination order from Defence Research and Development Organization (DRDO) to 7.5 per cent from 12.5 per cent.

However, BEL believes the compression in margins will be limited to 200 basis points, and will remain in the range of 20-21 per cent due to efficiency gains. BEL has EBITDA margin in the 16.7-23.6 per cent range over the past five fiscal years.

It is trading at 13 times one-year forward earnings, a valuation level in line with global defense electronics companies.

BEL would trade at a premium to global peers due to better revenue visibility.




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