Rich valuations justified for BEL

Manufacturing capabilities, robust order book & defence dominance dispel concerns on revenue

Analysts are undeterred by Bharat Electronics Ltd (BEL)’s revenue-target slip. BEL recorded revenue of Rs 1,500 crore, down five per cent year-on-year (y-o-y), missing estimates of Rs 1,700 crore. After results, it fell at half the rate of decline of the Sensex. Vendor execution delays (mainly from BEML, formerly Bharat Earth Movers Limited) in supplying equipment resulted in this miss for the December quarter.

Mahesh Bendre of Way2Wealth Research brushs aside this blip, since BEL operates in the niche defence segment, where product approvals from clients may take two years.

As BEL would require bulk clearances for mass-level production, most clearances are expected by the second half of any financial year. Further, the management re-affirming its confidence to meet the revenue growth target of eight to 10 per cent for FY16 indicates that revenues in Q4FY16 may offset the fall in the December quarter. According to analysts at IDFC Securities, as BEL expects to achieve revenue of Rs 7,400 crore, it is likely to see a 19 per cent  y-o-y growth in Q4FY16.

While revenues were down, operating profit at Rs 292 crore registered a five per cent y-o-y growth in Q3FY16. Helped by Other Income of Rs 135 crore (up 20 per cent y-o-y), profit in the December quarter at Rs 295 crore rose nine per cent y-o-y. Operating efficiencies saw improvement in Q3FY16 as operating margin increased from 17 per cent in Q3FY15 to 19 per cent in Q3FY16. But, analysts are wary on margin sustainability. "As much of the margin expansion is on raw material price correction and inventory gains, I am not optimistic these margins will continue," says Santosh Yellapu of Angel Broking.

With a robust order book as on December 31, 2015, at Rs 32,333 crore, translating to 4.8 times order book to last-12-month-sales ratio, there's little concern on medium-term prospects. Analysts say the key positives, apart from order visibility, which include BEL's dominance in the defence space, its strong manufacturing capabilities, collaborations with foreign technology partners, and research strength, justify the stock's rich valuation of 20 times FY17 price-earnings. As many as 16 of 20 analysts polled on Bloomberg recommend 'buy', with a target price of Rs 1,343. The 11 per cent price correction over the past month provides an attractive entry.