Bharat Electronics sees large defence orders bolster growth despite Q1 margin miss

Investment View and Valuation

Motilal Oswal Financial Services reiterated its BUY recommendation on Bharat Electronics despite a slight miss in 1QFY27 profitability. The broker remains positive on the company’s large and diversified defence order pipeline across the Army, Navy and Air Force, while its FY27 order-inflow guidance remains intact.

The target price was raised to Rs 530 from Rs 510 through a valuation roll-forward to 45 times September 2028E earnings.

1QFY27 Financial Performance

Bharat Electronics reported 1QFY27 revenue growth of 25 per cent year on year to Rs 5,500 crore, which was 8 per cent above Motilal Oswal’s estimate. However, gross margin declined to 45.5 per cent from 53.2 per cent in 1QFY26 and was below the broker’s 53.0 per cent forecast.

Management attributed the margin contraction primarily to an adverse execution product mix and said commodity-price inflation did not materially affect profitability. EBITDA increased 12 per cent year on year to Rs 1,390 crore, while EBITDA margin contracted 300 basis points year on year to 25.1 per cent, compared with the broker’s 29.0 per cent estimate. PAT rose 8 per cent to Rs 1,050 crore but was 7 per cent below the broker’s estimate.

Defence Order Book and Execution Outlook

BHE’s order book stood at Rs 72,300 crore as of July 1, 2026, following approximately Rs 4,000 crore of inflows in 1QFY27. Around 90 per cent of the backlog is defence-related, with the balance coming from non-defence businesses. The defence order book is broadly evenly split across the Army, Navy and Air Force.

Major programmes, including electronic fuzes, LRSAM, LCA Mk1 and Mk1A LRUs, BMP-2 upgrades, Ashwini Radar, the Mi-17 V5 electronic-warfare suite and Arudhra multi-platform radar, collectively account for around Rs 20,000 crore. FY27 execution is expected to be led by LRSAM, with approximately Rs 2,100 crore of revenue, followed by Akash Army at Rs 1,000 crore to Rs 1,200 crore, along with BMP-2 upgrades, Arudhra, electronic-warfare systems and LCA LRUs.

FY27 Guidance and Upcoming Programmes

Management retained its FY27 guidance for approximately 15 per cent revenue growth, EBITDA margin of approximately 28 per cent and order inflows of more than Rs 55,000 crore, including the Rs 30,000 crore QRSAM programme. QRSAM was expected to receive Cabinet Committee on Security approval by 2QFY27.

Other expected FY27 inflows include next-generation corvettes, Project 75(I), Project Shatrughat, Samaghat of around Rs 9,000 crore, Project Shakti Phase IV of around Rs 2,000 crore and HAMMER weapon integration worth over Rs 2,500 crore, alongside base orders and support contracts.

Longer-term opportunities include Project Kusha, for which commercial orders of around Rs 40,000 crore are expected by FY29, as well as next-generation destroyers, Project 17B, AMCA, missile electronics, counter-drone systems, next-generation radars and exports.

Exports, R&D and Indigenisation

BHE targets exports at 10 per cent of revenue within five years. Its export order book stood at approximately USD 465 million, while the active opportunity pipeline was four to five times larger across 15 to 20 products.

Management is targeting USD 300 million of export orders in FY27, supported by software-defined radios, weapon-locating radars, counter-drone systems, directed-energy weapons, airborne TR modules and build-to-print electronic modules.

BHE plans more than Rs 2,200 crore of R&D spending and Rs 1,200 crore of capex in FY27. Accelerated indigenisation, including the target to eliminate imports of electronic modules other than semiconductor components within five years, is intended to support technology ownership and mitigate raw-material cost pressure.

Earnings Outlook and Cash Flow

Motilal Oswal trimmed its FY27E and FY28E estimates by 1 per cent each after the quarterly performance. Nevertheless, the broker forecasts FY26–29 sales, EBITDA and PAT CAGRs of 15 per cent, 14 per cent and 15 per cent respectively.

The broker expects strong operating and free cash flow, supported by working-capital control.

Key Risks

• Slower defence or non-defence order inflows.
• Stronger competition.
• Further delays in finalisation of large tenders.
• A sharp rise in commodity prices.
• Delayed Ministry of Defence payments, which could affect revenue, margins and cash flows.