Better days ahead for Bharat Electronics

Market leadership in defence electronics sector and focus on R&D to help it gain from government's defence spending

Government-owned defence equipment manufacturer Bharat Electronics Limited (BEL) is expected to outperform the broader indices in the next two years. The  stock, a multi-bagger for investors since 2014, thanks to the government’s renewed focus on the defence sector, could gain thanks to the defence capital budget of Rs 94,600 crore.

Also, with home-grown companies expected to benefit from the new defence policy (likely in January 2016), Vijay Gyanchandani of Way2Wealth believes BEL, which holds a 37 per cent market share (despite the privatisation drive in FY07), is poised to capture a larger share in the defence space. “BEL has the right execution power and scale and if the government executes its defence plans, BEL has to be the forerunner,” he says.

Stretched timelines for approval from clients has impacted the revenue growth of BEL. Historically, its revenues have expanded by a mere four per cent. However, the first half of FY16 saw revenues grow seven per cent on a year-on-year basis.

Earnings before interest, taxes and amortisation (Ebitda) doubled, thanks to improved operational efficiencies and margins expanded from three per cent to seven per cent. Profits doubled (Rs 267 crore) in the first half of FY16 were helped by other income (mainly dividends of Rs 263).

Outsourcing non-core products and reduced dependency on foreign technology due to better utilisation of in-house talent pool has helped  improve operational performance. Research and development cost has steadily climbed from 3.6 per cent in FY07 to eight per cent in FY15. Raw material and employee costs (85 per cent of total cost) might, however, remain a drag on Ebitda. Being a ‘zero debt’ public sector firm could support BEL’s working capital requirement as its scale of business increases.

An impressive order book (Rs 21,648 crore as on October 1), which translates to 3.1 times a book to bill ratio, is a key positive for BEL. Analysts have raised the FY17 earnings growth estimates by 10-12.5 per cent, as BEL expects order flows of Rs 15,000 crore in FY17. Trading at 21 times its FY17 price to earning ratio, BEL’s stock holds the potential for investors wanting to cash  on India’s defence theme. Analysts believe at current valuations, BEL is at a discount to global defence companies, trading at 24-25 times the price to earnings ratio, hinting at further room for re-rating the stock.