Recommendation from Engineering - Industrial Equipments Sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

BHARAT ELECTRONICS: WELL-DEFENDED FOR GROWTH

HERE IS WHY
✓Huge order book
✓Ambitious expansion plans
✓Strong balance-sheet

A lot has changed in the last one year since Russia invaded Ukraine. Defence spending is increasing globally. The Indian government has set a target for defence output of USD 25 billion by 2025. In fact, the government is determined to making India self-reliant in the defence industry and has set a target to achieve defence exports worth ₹25,000 crore by 2024. Owing to these developments, the choice for our low price scrip for this issue is Bharat Electronics Ltd. (BEL). Established in 1954, BEL is a Navratna defence public sector undertaking (DPSU), which provides electronic equipment to the defence sector. BEL is a dominant supplier of radar, communication and electronic warfare equipment to the Indian armed forces.

The company has nine manufacturing plants and two research facilities spread across India. The Bangalore and Ghaziabad units are BEL’s two major units with the former accounting for the largest share of the company’s total revenue and profits. As the largest domestic electronics manufacturer, BEL benefits from economies of scale. During 9MFY23, BEL has bagged numerous prestigious orders. The company’s unexecuted order book stood at ₹50,116 crore as on January 1, 2023. Implied order inflow stood at ₹1,452 crore during Q3FY23 and ₹3,736 crore during 9MFY23. The order book is 2.89 times the TTM revenue, indicating adequate revenue visibility in the medium term. 

Furthermore, the government’s emphasis on implementing enabling reforms to increase India’s defence product manufacturing capability while gradually reducing imports will support order inflows in the medium-to-long term. In Q3FY23, BEL’s consolidated revenue rose by 28 per cent YoY to ₹4,153.12 crore compared to ₹3,701.65 crore from the previous year’s same quarter. On a sequential basis, revenue grew by 4.83 per cent. EBITDA grew by 3.69 per cent YoY to ₹922.03 crore compared to ₹889.22 crore from the previous year’s same quarter, while sequentially it declined by 2.13 per cent.

Net profit stood at ₹603.01 crore compared to ₹584.87 crore, a YoY growth of 3.1 per cent while sequentially it stood flat, declining by 1.92 per cent. BEL is largely focusing on growth-driven capex during the current fiscal year with an expected outlay of around ₹600 crore. The company has acquired 200 acres of land in Nagpur to expand into arms and ammunition. The company is also establishing electronic warfare for ground-based equipment in Ibrahimpatnam in Hyderabad. It is building an advanced night vision factory at Nimmaluru, spending close to around ₹340 crore along with setting up a facility at Anantapur for manufacturing and integration of big systems for defence and paramilitary segments. 

All these facilities will be commissioned in the next 2-3 years. At TTM, BEL is trading at a PE of 25.1 times, which is slightly higher than its three-year median PE. The company has maintained a healthy average (five-year) ROE and ROCE of 19.53 per cent and 27.21 per cent, respectively. It has healthy CFO and PAT of 1.34. The company is also virtually debt-free with an interest coverage ratio of 371.32 times. Although the company is available at a slightly higher valuation, it has been consistent with its growth with ongoing capex and strong order inflow. In addition, it has a robust balance-sheet with a strong order book. Considering these factors, we recommend BUY.