On Strong Footing

Bharat Electronic is likey to perform better in the near future on the back of a robust order book and prospective growth avenues.

Bharat Electronic, or BEL, has been one of the most stable stocks on the bourses over the past one year. The stock currently trades at almost the same levels as it did nearly a year ago, implying that it has underperformed the Sensex. However, a strong set of numbers, as reflected by the provisional results for FY11, a robust order book and prospective growth avenues point to a strong outlook for the company in the near term.

Catering to the defence electronics requirements of the Indian armed forces, BEL, a navratna company, specialises in product segments such as radar, communication and electronic warfare. The defence sector currently accounts for over 80% of the company?s total revenues. In the non-defence segment, the company?s product range includes electronic voting machines (EVM), solar products, telecom and direct-to-home (DTH) devices among others.

For the financial year ended March 2011, the company has stacked an order book worth Rs 23,600 crore which is more than double its order position of about Rs 11,350 crore a year ago. The current level of order book translates into 4.2x its standalone provisional revenues for FY11 providing it reasonable revenue visibility over the next few years.

Moreover, with the Budget allocation to defence sector having risen by almost 12% to Rs 1.64 lakh crore along with an increase in defence capital acquisition to Rs 55, 000 crore and defence capex to Rs 69,199 crore for FY12, BEL is expected to be the prospective gainer given its stronghold in the defence capital expemditure.

The company is also set to gain from the offset clause with many foreign vendors approaching BEL for partnerships to fulfill their offset obligations. This is expected to boost the company?s export revenues. The offset policy obliges firms to engage in some local manufacturing and transfer certain technologies.However, growing private participation in defence procurement (both in major and offset contracts) can dilute the company?s future revenue prospects.

The company?s revenues for the fourth quarter ended March 2011 rose more than 27% vis-à-vis a year-ago period while its bottom line grew over 124% during the period. For the financial year ended March 2011, turnover rose about 5% to Rs 5,635 crore while profits surged about 12% to Rs 804 crore resulting in an improved earning per share (EPS) from Rs 92 per share a year ago to Rs 101. Having kept its raw material and employee costs in check, the operating margins of the company have improved by about 20 basis points during this period. Going forward, BEL aims to double its turnover to Rs 10,000 crore by 2012-13. Given its strong order book position, this definitely looks achievable, though timely execution remains a key concern.

BEL currently trades at a price-earning multiple (P/E) of 17.9, which is reasonable given its cash rich and near zero debt status. Its consolidated cash balance as of March 2010 was over Rs 3,500 crore which translates into Rs 448 per share. The company has a healthy order book position, which is set to get healthier after the higher budgetary allocation to defence, giving the company a reasonable revenue visibility in future. We maintain a buy on the scrip at the current levels.

Key Factors

  • Strong Order Book - Outstanding orders in hand as at the end of FY11 more than doubled to Rs 23, 600 crore vis-à-vis a year ago.
  • High Budget allocation - Budget 2011 has increased the allocation to defence sector by almost 12% to Rs 1.64 lakh crore.
  • Healthy Financials - Impressive sales growth (Y-o-Y) for the second consecutive quarter in a row. Operating margins have improved considerably over the last few quarters.
  • Negatives

  • Competition - Competition from Private players is set to increase in future given the Government?s intent of involving private players in defence procurement.
  • Dependence - There is an over-dependence on the defence sector which attributes more than 80% of the company's total revenues.
  • Slower Execution - Given the complex nature of defence deals and involvement of the Government, order execution tends to be at a slower pace.
    Bakul Chugan Tongia