Bharat Electronics to gain from strong order book and new opportunities

Semiconductor shortage and execution delays, however, dented its FY22 performance

The provisional March quarter (Q4) and financial year 2021-22 (FY22) sales of defence electronics major Bharat Electronics (BEL) were marginally lower than estimates. Yet, the company’s share price has gained over 13 per cent in the seven sessions (including 6.55 per cent on Thursday). Recent order wins and the prospect of a significant growth opportunity opening up has boosted sentiment. 

Thursday’s gains follow reports that the defence ministry will unveil a third list of over 100 military systems and weapons, which will see import restrictions. The move is towards a push towards defence equipment indigenisation, and in continuity with two lists issued earlier in August 2020 and May 2021. According to a PTI report, the defence ministry said orders worth more than Rs 2.1 trillion are likely to be placed on the Indian industry in the next five years as part of the items covered in the third list which will comprise major equipment and platforms scheduled to be “completely indigenised” by December 2025.

Meanwhile, last week, the company reported an 8.5 per cent growth in sales for FY22 and a 9 per cent year-on-year (YoY) decline in Q4. The full-year sales performance missed the company’s guidance of 10-12 per cent growth largely due to the sluggish project execution in Q4.

The company highlighted that its annual sales crossed the Rs 15,000 crore-mark, its highest ever, despite the pandemic and global semiconductor shortage.

While sales were lower than expected, most brokerages are bullish on the company’s prospects due to multiple triggers. Analysts, led by Sandeep Tulsiyan of JM Financial, expect sales growth to accelerate thanks to a robust order book, import ban on high value equipment as well as subcomponents, opportunities in the automobile electronic segment, diversification in new business segments and exports.

One of the positives is its large order book, which stood at Rs 57,000 crore as on April 1. This is just under four times its annual sales and could help it report revenues of over Rs 15,000 crore over the next couple of years. Its new orders in FY22 came in better than estimates at Rs 18,000 crore, led by major orders, which included avionics pack for Light Combat Aircraft (LCA), advanced electronic warfare suite for fighter aircraft, instrumented electronic warfare range and electronic voting machine (EVM).

The government’s efforts to indigenise defence production could be a key revenue driver. Say Dhirendra Tiwari and Amit Shah of Antique Stock Broking, “The government’s emphasis on indigenisation and placing 209 items reserved for domestic procurement could result in orders worth Rs 5 trillion being available for domestic defence firms to procure over next five to seven years. This puts Bharat Electronics in a sweet spot given its market leadership position in the defence electronics segment.”

Morgan Stanley Research expects Indian defence equipment production to grow at 10 per cent annually during FY21-25 in value terms. And BEL is expected to outperform industry growth.

BEL’s exports stood at $32.26 million (Rs 244 crore) in FY22. The company is looking at scaling up its exports, which has ranged from 2-3 per cent of sales over the last couple of years, to over 10 per cent share. The order book for exports is over $400 million. 

The company had signed a $93 million contract with Airbus and a $73 million contract with US-based Hyperion Global Group.

Diversification beyond the defence space is another positive which reduces risk and offers new growth opportunities. The company forayed into the metro segment (train control system), which has a potential market of Rs 7,000 crore. Among other non-defence segments are automobile (lithium ion batteries and cells), space electronics, unmanned systems and medical electronics. Non-defence order book, according to Antique Stock Broking, stands at around Rs 8,000 crore and contributes 14 per cent of the order book.

Including Thursday’s surge of 6.6 per cent, the stock has risen about 78 per cent over the past year; it is up 15 per cent over the last six months. It is trading at 18 times FY24 earnings. The company has a stronger track record than its listed capital goods peers and, hence, does not deserve to trade at a 47 per cent discount to those peers, says Morgan Stanley Research.