Improved execution likely to drive growth gains for Bharat Dynamics

Bharat Dynamics sees strong revenue visibility with easing supply chain hurdles and robust orders, though near-term stock upside may be capped due to rich valuations

Defence major Bharat Dynamics (BDL), a public sector undertaking (PSU), reported a mixed performance in the fourth quarter of financial year 2024-25 (Q4FY25). While revenues doubled over the year-ago quarter, profitability was sub-par. The company’s order inflows and backlog are healthy, which offers revenue visibility.

 

However, brokerages believe the pace of execution is crucial for the company, which makes guided missile and allied equipment for the Indian armed forces. Analysts are positive on the medium- to long-term prospects of the stock, which is up 93 per cent in just three months. However, the near-term upside might be limited given that the stock at 54 times is trading at a premium to its five-year average of 34 times.

 

For Q4FY25, revenues saw a 108 per cent jump year-on-year (Y-o-Y) and 112 per cent jump sequentially to ₹1,770 crore. On an annual basis (FY25), revenues were up 42 per cent to ₹3,345 crore. Growth on the top line front was driven by better execution.

 

Revenue growth going ahead will be a function of the order inflows and backlog, as well as execution. The company reported orders worth ₹6,660 crore for FY25 and this was boosted by the deal related to the medium range surface-to-air missiles (MRSAMs). This coupled with supply of armaments to the Indian armed forces resulted in a healthy order book of ₹22,700 crore. The order book and backlog translates to seven times FY25 sales and provides revenue visibility. Moreover, the pipeline of orders at ₹20,000 crore is also strong from a three-year perspective. The pipeline includes a large order of Astra Mk II air-to-air missile, MRSAM, and quick reaction SAM (QRSAM). 

 

Despite a strong order book and backlog, the company was not able to execute some of the orders given the supply chain challenges it has faced over the two-to-three years. The delays were largely due to disruption given that it was dependent on some parts from war-affected nations Russia and Israel. With these challenges slowly easing, Antique Stock Broking expects execution to pick up, leading to revenue growth of 30 per cent in FY26.

 

Amit Shah and Dhirendra Tiwari of the brokerage believe normalisation of supply chain, and development of an alternative supply chain would help BDL smoothly execute the large order backlog it has accumulated over the last three years.

 

Nuvama Research believes that with a robust backlog of about ₹22,800 crore at FY25-end, BDL is well-positioned to achieve a revenue growth of over 60 per cent during FY25-FY27. Analysts led by Vijay Bhasin of the brokerage point out that going forward, sustained/improved execution momentum along with levelling up of current operating profit margin levels shall be key triggers.

 

The Street will also keep an eye out for margin trends. Gross margins in Q4FY25 at 40.8 per cent disappointed as compared to the year-ago level of 66.7 per cent. For FY25, gross margins were 49.8 per cent as compared to 62.1 per cent in FY24. However, in FY24, ₹165 crore was adjusted due to refund from a customer on cost of materials consumption. Adjusted for this, FY24 gross margins were at 55.2 per cent. Reported operating profit margins were at 16.8 per cent for FY25 as compared to 37 per cent in FY24. Adverse revenue mix and higher export-related expenses booked during the quarter impacted the company’s margins.

 

Given the elevated R&D (research and development) expenses likely to be incurred in FY26, the operating profit margin will see only a limited improvement of 70 basis points (bps) Y-o-Y, says Antique Stock Broking. However, analysts expect the margin to see a sharp improvement in FY27 as R&D expenditure stabilises post-FY26.

 

Nirmal Bang Research expects revenue, operating profit, and net profit over FY25-FY27 to grow by 27 per cent, 75 per cent, and 53 per cent, respectively. However, given the rally in the stock, it has a “Hold” rating as one-year forward price-to earnings (P/E) ratio is above the five-year averages.