BEL's sales trajectory will sustain on multiple growth opportunities

Investors may consider buying the stock on dips, say experts

The country’s second-largest listed defence major by market capitalisation, Bharat Electronics (BEL) has delivered a mixed performance during the July-September quarter. While revenues met Street estimates, it lagged on the operating and net profit fronts. 

Riding on strong execution and improvement in semiconductor supply, the company posted an 8 per cent increase in its top line.

BEL reiterated that its revenue growth target is 15 per cent for FY23 while brokerages such as Elara Securities expect it to achieve 19 per cent uptick in top line. Growth drivers for the year include execution of export orders and traction in the electronic voting machine (EVM) segment.

Sandeep Tulsiyan and Gaurav Uttrani of JM Financial expect sales to grow at 15 per cent annually over the next two-three years. This is on the back of increased inflows with the indigenisation drive and back-ended execution of large projects such as surface-to-air missile systems (Akash and Barak). It’s also because of a ramp up in servicing income, exports and new businesses, including electric vehicles and metro rail.

What should help sustain growth is the robust order pipeline ($12–15 billion) over the next three-four years.

Several partnerships (both defence and non-defence) that the company has entered into could help it sustain the momentum. This implies order growth and cash translation over the next few years, said analysts at Nuvama Research.

Rising share of non-defence is an important trigger for the stock. The company recently signed an agreement with Triton Electric Vehicle for manufacturing hydrogen fuel cells. It won an order worth Rs 8,000 crore for supplying lithium-ion battery packs. The agreement with Triton puts BEL on the path of diversifying further into non-defence. This segment now accounts for 10 per cent of revenues. And, the company seeks to scale this up to a quarter of its sales over the long term.

Revenue growth during the quarter was steady and gross margins came in better-than-expected. This was due to higher indigenisation, improved product mix and lower raw material cost. But operating profit margin (OPM) performance disappointed. 

Margins, which contracted 171 basis points year-on-year (YoY) to 21.7 per cent, were pegged back by increase in employee costs and other expenses. The company has a 22-23 per cent target for margins during the current year.

Most brokerages are positive on outlook, given the large order book, Centre’s policy on defence procurement/indigenisation, exports (expected to grow 60 per cent for two years) and opportunities in multiple sectors.

At the current price, the stock is trading at 23 times its FY24 earnings. Investors can consider it on dips.