BEL stock retains premium even as other defence PSUs fail to draw interest

Proven execution record and stable financials are its key positives

The Bharat Electronics’ (BEL) stock has not been quite rewarding for its investors in the past year (down 33 per cent), but same is the case with Hindustan Aeronautics (HAL) and Bharat Dynamics (BDL), which have seen 40 per cent and 31 per cent price erosion in the same period. Interestingly, despite being the talked-about listings of 2018 in the defence sector, the latter two are yet to catch the fancy of investors. BEL, on the other hand, seems popular with foreign investors who have raised their holding stake in the public sector defence equipment maker to 7.5 per cent as on March 2019 from 6.44 per cent a year ago. HAL and BDL (also PSUs) haven’t evoked a similar interest yet, with foreign holdings below one per cent. However, given the sharp correction and outlook, the risk-reward now looks positive for BEL.

Reasons such as well-established order execution record, meaty and well-diversified order book of over Rs 50,000 crore providing about four years of revenue visibility and reasonably predictable financials puts the BEL stock ahead of its competitors.

HAL and BDL are more specialised manufactures with aeronautics being HAL’s niche and BDL focusing on missiles and ammunitions. BEL is present across segments, with its products such as long-range surface missiles, weapon locating radar, communications systems finding fit in surface, aeronautical and marine equipment.

Citi Research having ‘buy’ rating notes that BEL has significant competitive advantages in technology, indigenisation, tie-ups with global defence majors, and relationships with the Defence Research and Development Organisation, Army, Navy and Air Force. “We see BEL donning the role of a lead integrator and moving away from smaller sub-systems to consolidate its position in larger systems,” adds Antique Stock Broking.

Fundamentally, the good spell of FY18 is expected to continue in FY19 and FY20. Provisional numbers for FY19 indicate 16 per cent increase in revenues (other details awaited), while analysts estimate its FY20 topline to grow 12-13 per cent. The more important factor is the likely 100 per basis points year-on-year expansion in operating margin, which is pegged at 21 per cent for FY19. Margins assume significance for BEL, given that the new procurement policy announced by the government for defence purchases last year cast some doubts over its profitability. Citi highlights that new policy will not affect BEL’s margin for at least two years and depending on the impact on nominated orders margins could be affected by 50-200 basis points. Yet, given the cost pass-through options available for BEL, analysts feel a steep margin erosion is unlikely. Trading at 12.5x FY20 earnings, BEL’s valuations are also attractive.