Bharat Electronics: Strong order flows, re-rating ahead

Well positioned to gain from govt's indigenisation drive

The Bharat Electronics scrip has gained 44 per cent since December and tripled in value over the past year. This is due for re-rating, given the government's stress on domestic manufacturing and expectations of higher orders for the leader in the defence electronics space. The government efforts at indigenisation will benefit the company, which gets 83 per cent of revenue from defence projects. Every five per cent incremental localisation is expected to improve its market pie by 17 per cent, feel analysts at Jefferies. They believe indigenisation will gradually move from the current 30 per cent to 40 per cent over the next five years.

Of the Rs 1 lakh-crore defence projects cleared by the government recently, Bharat Electronics is executing projects worth Rs 7,000 crore for supplies related to integrated air command and control systems. The management is looking at an addressable market of Rs 40,000-50,000 crore in tactical communication, combat aircraft and battlefield management systems over the next five years.

The company is well positioned to gain from rising defence expenditure due to its manufacturing strength, execution record, relationship with defence/ government agencies and tie-ups with foreign technology partners, say analysts at Motilal Oswal Securities. The company had entered into a joint venture (JV) with Thales of France in October 2014 for the development of radar, for both civilian and defence use. With easing foreign direct investment (FDI) norms for the sector and given its leadership, the company will continue to be the preferred JV partner for foreign players.

The company expects orders worth Rs 5,000 crore this financial year, and about Rs 7,000 crore for FY16. Order backlog at the end of September was pegged at Rs 22,900 crore. Analysts at Jefferies say the earnings could grow at 14 per cent annually over FY14-17. Between FY08 and FY14, its revenues grew at an annual rate of eight per cent, while earnings grew two per cent annually.

Given the strong growth over the next 18 months and better valuations, most brokerages believe the stock, whose five-year historic price per earnings is pegged at 14 times, would re-rate further. Valuations could improve on successful listing of another government undertaking, Hindustan Aeronautics, feel Sharekhan analysts.

At the current price, the stock is trading at 19.8 times its FY17 estimates; analysts believe it deserves a valuation of 22 times. This translates to a target price of Rs 3,700, a return of 11 per cent from the current levels.