Bharat Electronics' growth story is intact after excellent Q4 performance

Bharat Electronics (BEL) reported excellent results for the January-March quarter (Q4) of FY24, which were driven by decent EBITDA margins and higher PAT as well as good revenue growth. Order inflows were also good.

BEL is a major beneficiary of the policy of defence indigenisation. Its revenue market share of defence manufacturing is around 12-13 per cent.

The Q4FY24 revenue was at Rs 8,530 crore (up 32 per cent year-on-year or Y-o-Y and up 106 per cent quarter-on-quarter or Q-o-Q) which was in line with estimates.

The EBITDA grew 25 per cent Y-o-Y to Rs 2,280 crore, with gross margin at 48.4 per cent (flat Y-o-Y).

The EBITDA margin contracted 160bp Y-o-Y to 26.7 per cent due to a high base. The PAT was at Rs 1,780 crore (up 31 per cent Y-o-Y), which was partly driven by higher other income (up 225 per cent Y-o-Y).

Order inflows hit Rs 8,240 crore in Q4FY24, a decline of 52 per cent Y-o-Y on a high base. The order book increased by 25 per cent Y-o-Y to Rs 76,000 crore (almost 4x the last 12 months revenue).

For FY24, BEL reported revenue, EBITDA and PAT growth of 14 per cent, 23 per cent and 34 per cent respectively and it beat margin guidance of 22-23 per cent reporting 24.8 per cent.

Order inflow for FY24 grew by 74 per cent to Rs 35,400 crore. Free Cash Flow grew by 575 per cent to Rs 4,000 crore on better operating cash flow.

The key defence orders were electronic fuses, electronic warfare systems, communication systems for naval warships, fire control systems, Akash prime weapon and systems, radars, sonars, software defined radios, night vision devices, tactical communication systems, as well as non-defence items.

The order book included export orders of $407 million (vs. $211 million in FY23). The company achieved exports of $93 million (up 92 per cent Y-o-Y), including exports of transmit & receive (TR) modules, compact multi-purpose advanced stabilisation system (compasses), radar & EW systems, medical electronics, communication equipment, etc.

BEL has a market share of 12 per cent in the overall defence market and a market share of almost 60 per cent in the highly specialised defence electronics segment.

Given defence indigenisation potential of Rs 5 trillion over the next five years, it’s presence across a wide range of defence platforms and products should lead to strong growth if it can maintain market share as a premier Indian electronics specialist.

Analysts are increasing earnings estimates to factor in the defence policy and the company’s strong margins and market share. The compounded annual growth rate (CAGR) in revenues and EBITDA could be at 20 per cent or better through till FY26 and maybe 20 per cent CAGR is possible for even longer. Free cash flow should also be high. BEL has a cash surplus of Rs 11,000 crore, which means it can fund capex comfortably.

One key assumption is that there will be no slowdowns in defence and non-defence segments. Also that competition in the key segments will not intensify. Given government processes, there are the usual worries about delays in finalisation of tenders or delays in payments from the Ministry of Defence. Normal business risks include a rise in raw material prices or supply chain issues. The stock has outperformed consistently but it could still have some upside.