Bharat Electronics' share sale looks attractive

Investors can buy up shares sold by govt as order book, core show, & net profit growth look strong

The government on Wednesday initiated its five per cent stake sale in Bharat Electronics Limited (BEL) to raise Rs 1,600 crore. The sale of 11.1 million shares is at a floor price of Rs 1,498 against closing price of Rs 1,560 on Tuesday. Institutional investors were given buying chance on Wednesday. Retail (small) investors can buy up on Thursday. The stock ended three per cent lower than previous close at Rs 1,510 on Wednesday.

This stake sale is being looked at as a good opportunity for investors, given the strong prospects of the company. Not only is the order book strong but profitability also remains robust. Analysts see a double-digit net profit growth and strong return ratios.

Renewed focus of the government on local weapon systems and components has helped BEL regain its growth momentum after slightly subdued revenue growth during FY11-14. The order book has been growing steadily. From Rs 32,000 crore at the start of FY17, analysts at Credit Suisse estimate it to grow a further Rs 13,500 crore per year over FY17-19. The company remains a preferred vendor for missile systems, which is a positive.

The order book outlook has improved further after the Budget raised defence capital expenditure by 20.6 per cent. The company is better placed than peers given its track record, legacy, and strong entry barriers to the business. Analysts at Ambit see order inflows of Rs 12,000 crore-15,000 crore in FY17 and FY18, an 18 per cent annual growth. While defence remains the mainstay, orders in non-defence segment are also expected to get a boost, say analysts.

The company's profit growth has been strong over the past few years. Operating (core) profit has continued to grow from Rs 1,233 crore in FY12 to Rs 1,993 crore in FY16, helped by cost controls and product mix. Operating profit margin is expected to be 20 per cent in FY17. With largely the same product mix in FY18, and as gross margin remains at elevated levels, analysts believe there could be positive surprises on the profitability front.

Given growth visibility, strong net profit growth and return ratios, as well as reasonable valuations, analysts at Credit Suisse have given a one-year stock target price of Rs 1,800. Analysts at Ambit, who have a target price of Rs 1,700, have recommended a subscribe rating to share sale as they believe current valuations are reasonable, given double-digit growth seen over the next decade.