Strong order pipeline, better margins accelerate Bharat Electronics stock

Bharat Electronics (BEL) continues to be on investors’ radar, and has gained over 20 per cent since its August lows. The firm’s order flow remains strong. In addition, it recently bagged an Akash missile systems order worth Rs 5,357 crore, with delivery expected over the next three years.

For FY20, the firm has generated orders worth Rs 9,000 crore. Achieving its full-year guidance of Rs 15,000 crore may now not be difficult, say analysts.

Key orders in the pipeline are a coastal surveillance naval project and smart city and homeland security projects, that could add up to Rs 6,000-6,500 crore of orders, according to analyst estimates.

Given the strong order inflow and revenue visibility offered by those in the pipeline, the Street remains positive on BEL.

The company had, a few days ago, reiterated its revenue growth guidance of 12-15 per cent for FY20. It expects to maintain this run-rate over the next 4-5 years. Analysts add that the order pipeline remains robust. A run rate of Rs 15,000-20,000 crore of order inflow per year remains possible, for the next few years.

However, concerns over margins, which had led to underperformance in the past, remain. Under the new pricing policy for nomination projects, finalised by the Ministry of Defence, margins have been curtailed to 7.5 per cent, against 12.5 per cent earlier.

The company, however, continues to work on operating efficiencies and diversifying its orders in non-defence segments. Analysts also say that although there has been no change in payment terms from customers (15 per cent advances for new contracts), budget constraints have strained collections and hurt working capital, which is expected to normalise over the medium term.

Some improvement in receivables is expected, on account of advances from the Akash missile order, which should restrict further working capital deterioration.

Analysts remain watchful as they do not see much upside from here on. Those at Prabhudas Lilladher have lowered their Ebitda margin estimates, and hence reduced earnings by 7 per cent and 4 per cent for FY20 and FY21, respectively. The target prices of Edelweiss Research, Motilal Oswal Financial Services, and Prabhudas Lilladher range from Rs 115-127 for the stock, which is trading at Rs 111-levels.