Thursday, August 9, 2012


Bharat Electronics (BEL) reported weak sales and order intake during Q1FY13. While sales dipped on continued deferrals and approval process delays from clients, order intake prospects remain bright for the coming one-two years on back of strong demand. Higher raw material costs coupled with unfavorable sales mix (low value adds items) impacted OPMs, which are expected to improve in balance FY13. Maintain ‘BUY’.

Approval delays hit sales volume; adverse sales mix impacts OPMs
BEL reported 15% YoY decline in revenue for the quarter due to approval delays and slow off take from clients. Management expects balance of FY13 to see decent pick up in both volumes and profitability driven by deliveries for Aakash missiles, Rohini radars and ground-based EW systems, and maintains its FY13 sales growth guidance of 15%. Also, low value add items and higher ToT sales (>20% of sales) impacted profitability. Higher input cost (sharp jump in RM to sales %) during the quarter is expected to come off in the coming quarters as indicated by the management on improved deliveries.

OI dips 22%, but revenue visibility and FY13-14E prospects good 
The company began the year with a quarterly OI of INR8.6bn versus INR11bn in Q1FY12, which is generally a non-material quarter both from execution and fresh awards perspective. Management remains positive on FY13E-14E intake quantum and quality, with sustained proportion of indigenised & DRDO based orders in WLR & EW systems and other missile systems. Also, management expects to form new JVs with a few foreign entities in FY13E which would provide fresh avenues for business wef FY14E & beyond. Company maintains FY13E fresh intake target at INR100bn (up 25 % YoY).

Outlook and valuations: Attractive; maintain ‘BUY’
BEL offers a decent long-term upside potential given its favourable positioning in the domestic defence market. The company has decent revenue growth visibility (book to bill at 3.8x on FY13E sales) and attractive prospects for a sustained order intake growth in the near to medium term with a strong balance sheet and cash in hand of INR65bn plus (67% MCAP). We maintain our ‘BUY/SO’ with a revised TP of INR 1617 (+33% upside), implying a PE of 9.5x on FY14E earnings.