More upside ahead for Bharat Electronics

Initiatives such as diversification into new businesses support the investment rationale

With the search for defensives becoming more difficult given macro and market uncertainties, Bharat Electronics Limited or BEL is among the few stocks that stand out. Given that it is on the buy list of most brokerages, it has made investors richer by 21 per cent over the past three months. Operating in the defence industry, with stronghold in missiles and radar technology, BEL offers a hedge against possible ramifications from the recent note ban. That its earnings do not depend on the traditional capital expenditure cycle, is an added advantage for investors. Recently Credit Suisse initiated coverage on BEL with "outperform" rating and a target price of Rs 1,800. The brokerage expects 14-15 per cent revenue rate and net profit growth in FY17-19, thanks to an order backlog of Rs 35,000 crore. Order inflows, too, are estimated at Rs 12,000-13,500 crore over the next three years. The faith in BEL is increasing primarily due to its recent initiatives such as outsourcing of non-critical products, diversification into new businesses, and strengthening international collaborations.
 
A closer look at the tentative order pipeline indicates that, apart from garnering repeat orders for Akash missiles, BEL is also poised for big-ticket tactical communication systems and battlefield management system orders in FY17-18. These are a part of BEL's strategy to diversify into new opportunities such as electronic warfare suites, air defence systems, and communications. This should augur well for investors in the next two-three years. Its recent move to outsource low-margin or non-critical products to small and medium enterprises will further enhance its production capacities, giving more room for BEL to focus on key products.
 
For these key strengths, analysts at Ambit Capital feel BEL is positioned as a unique player in the defence sector. They add that, with its closest private sector competitors (Tata Power SED and Astra Microwave) operating at a far less scale of Rs 400- 450 crore of revenues, global players would continue to partner BEL, given its track record and ability to invest in technology.
 
But all these positives could get disrupted if execution targets aren't met. Order tendering, awarding, and execution tend to be erratic and time-consuming for the defence sector. Though timelines have shrunk in the recent quarters, any lag from the government could disrupt BEL's show. Analysts say BEL has maintained a track record of beating Street estimates for the past three years. Going forward, with key variables such as order inflow and pipeline in place, the Street will closely monitor how well order sanctions progress for BEL.