Equity Research: BHARAT ELECTRONICS LTD

Summary

Bharat Electronics Limited is an India-based employer, which manufactures and resources electronic equipment and systems to the defense area as well as for non-defense markets. Its defense products are Land-based Radars, Naval Systems,Defense Communication Products, Electronic Warfare Systems, Avionics, Electro Optics, Tank and Armored Fighting Vehicle Electronic Systems, C4I Systems, Weapon Systems, Shelters and Masts, Simulators and Batteries, among others. Its non defense products include Homeland Security, Civilian Radars,Telecom and Broadcast Systems,Cyber Security, and e-Governance Systems, among others. It manufactures electronic products and systems for the navy, army, and the air force. It gives electronic manufacturing services in regions of printed circuit board meeting and testing; precision machining and fabrication; opto electronics additives and assemblies; microwave integrated circuit assemblies; additives modules, and offsets, among others.

ABOUT

Bharat Electronics Ltd. (BEL) is a defense-related public sector enterprise that specializes in professional electronics as well as defense electronics for the nation's armed forces. The largest domestic electronics producer, BEL, benefits from scale-related advantages. The Indian armed forces' primary source of radar, communication, and electronic warfare technology is BEL. Additionally, government ownership generates a sizable influx of orders on a nominated basis, resulting in a consistent stream of revenue for the business.

SHAREHOLDING PATTERN

RECENT UPDATES

• Bharat Electronics (BEL) has received order of Rs 2,118.57 crore from Cochin Shipyard for supply of various equipments consisting of Sensors, Weapon equipment, Fire Control systems and Communication equipment for six numbers of Next Generation Missile Vessels (NGMV), class of anti-surface warfare corvettes for Indian Navy.
• Bharat Electronics (BEL) has received new Defence and non-Defence orders worth Rs 3,289 crore during July and August 2023 (till date August 25). These orders are in addition to the Rs 8,091 crore orders, which are already received. With this, BEL has in all received orders of Rs 11,380 crore till now in the financial year 2023-24.
• Bharat Electronics (BEL) has set a target of Rs 20,300 crore turnover for financial year 2023-24 as demand for indigenous products is driving growth for the company. BEL achieved a turnover of about Rs 17,300 crore in the previous financial year, a 15 per cent growth. The Bengaluru-headquartered company has plans to start marketing offices in Brazil, Armenia and Kazakhstan.

KEY UPDATES:

• Strong order book brings better earning visibility going forward

BEL has received orders for both defence and non-defence products totaling Rs 3,289 core since July 1, 2033, for a total of Rs 11,380 crore so far in the FY24E. Orders for low-level light-weight radars, SONARS, IFF systems, SATCOM systems, EO/IR payloads, TRM/DTRMs, jammers, encryptors, data link systems, fire control systems, radars for directed energy systems, semi-rugged telephone exchanges, software-defined radios and various other types of radios, electronic voting machines, AMCs, and spare parts have been received post-July 1, 2023. Given its degree of experience, technical prowess, and good track record of execution, the company anticipates being a major beneficiary of the prospective prospects resulting from the government's emphasis on indigenization.

• Strategic alliances with various companies to focus on emerging business:

In order to handle expanding Defence and Non-Defence enterprises, including exports, BEL has created numerous strategic alliances and partnerships with Indian corporations/agencies, Ordnance Factory Board, DPSUs, academia, startups, specialist technology companies, and well-known global OEMs. 

• Diversification into allied non-defense areas to reduce dependency on imports

Energy storage devices are one of the non-defence sectors the corporation is focusing on as it diversifies. In FY23, BEL's non-defence business made up 11% of its annual sales while the defence business accounted for 87% of it. The company has been actively exploring diversification into related non-defence markets like energy storage products for electric vehicles with Li-ion and Fuel Cells and charging stations. With applications in energy storage, smart city platforms, and electric car charging stations, the business expects the non-defence sector to contribute between 11 and 20 percent of its sales in FY24E and FY25E. The aim for export income in FY24 is US$ 90 million, and the export orders in Q1FY24 totaled Rs. 87 crore.

KEY CHALLENGES

• High dependence on defence sector for orders with limited export business – The Indian defence sector is BEL's major customer, accounting for ~85% of the turnover. In case of any change in the procurement policy of the defence forces or a significant cutback in defence spending, the company's revenue and order book position can be adversely impacted. BEL's revenue booking and cash flows are vulnerable to delays in project execution or final payment clearance in some cases owing to high concentration of the Government sector orders. BEL is targeting to gradually increase its share of non-defence revenues over the medium term. In addition, BEL is planning to increase its export footprint by targeting higher defence equipment exports to friendly countries. At present, the export order book stands at Rs. 2,000 crore however, export earnings are being targeted to grow moving forward with BEL opening overseas offices in 5-6 countries including Sri Lanka, Myanmar, Oman, and Vietnam to increase its export presence.
• Moderate working capital intensive nature of operations, however, cushioned by healthy liquidity and significant customer advances – BEL's operations have generally remained working capital intensive in the past due to its high receivables and inventory holding requirement. Nonetheless, the company has been able to manage its working capital requirements through its internal cash accruals and sizeable customer advances. Additionally, BEL has adequate working capital lines, the utilisation of which has remained minimal, providing a comfortable liquidity headroom.
• Lithium & semi-conductor chip shortages: Lithium and semi-conductor chip shortages may have an influence on the company's plans to produce EV batteries and build battery charging stations. 

FINANCIALS

• In Q1FY24, BEL's sales and profitability both met or exceeded forecasts. With a healthy order book, the business may report continued good revenue growth. In Q1FY24, its combined revenue increased by 12.5% YoY to Rs 3,533 crore. 
• In Q1FY24, the company's EBITDA increased by 28.7% YoY to Rs 673 crore, while the EBITDA margin increased to 19% from 16.6% in Q1FY23. Lower raw material costs year over year helped to support an increase in EBITDA margin.
• Net profit for the company climbed 47% year over year to Rs 539 crore, and the net profit margin increased to 15.2% in Q1FY24 from 11.7% in Q1FY23
• The company's order book position as of the first of July 2023 was Rs. 65356 crore compared to Rs. 60690 crore as of the first of April 2023, and the book to bill ratio was 3.6x TTM sales.

AUG CONCALL SUMMARY:

Turnover and Order Book:

• BEL reported a 12.51% increase in turnover to INR 3,447 crores in Q1 FY24.
• The order book position is INR 65,356 crores.
• Expected order inflow of INR 20,000 crores in the current financial year.

Exports and Facilities:

• Targeting USD 190 million in exports for the year.
• Working on expanding facilities, including a fuse complex in Nagpur.

Financial Outlook:

• Expect to maintain a gross margin of 40-42% and an EBITDA of 21-23% for the year.
• Expect to maintain its EBITDA margin guidance despite provisions made in the last two quarters.

Exploring Non-Defense Opportunities:

• Exploring opportunities in the non-defense sector, including metro projects and civil aviation.
• Actively working on increasing indigenization and exports, but it may take time to reach the target of 10% exports.

Order Book Details:

• The order book is primarily defense-focused, with 95% of orders on a nomination basis.
• In discussions for the AEW and AWACS programs, specific details are not available.
• Working on the Tejas program, supplying avionic packages, but the exact value of the program is not disclosed.

Future Outlook:

• Expects to maintain a two-and-a-half to three-year order book and continue revenue growth of 17%.
• In preliminary discussions with HFCL but no finalized joint venture or contract manufacturing agreements.

Overall Strategy:

• Focused on expanding facilities and increasing indigenization to meet future demand.

VALUATION

• BEL reported an order inflow of Rs 20,690 crore in FY23, driven by the Ministry of Defense's issuance of several sizable orders at the close of FY23. The company met its FY23 order inflow projection, which was estimated to be between Rs 18,000 and 20,000 crore. For FY24E, the company has estimated an order inflow of Rs 20,000 crore. In Q1FY24, BEL received orders worth Rs 8,091 crore, while the value of its order book was Rs 65,356 crore. In Q1FY24, the firm exceeded its overall order inflow guidance by 40%, a significant increase over the Rs 850 crore order inflow in Q1FY23. Large orders for QRSAM, MRSAM, and naval platforms that are due in FY25 may, in the medium term 9, present a multi-year revenue growth potential.
• BEL is also working on expanding into civil markets including smart cities, homeland security, metros, and software as a service (SaaS) in order to increase its non-defense income. Over the next 12 to 18 months, the current metros offer an opportunity worth Rs. 7,000 crore.
• The company is looking for investments in charging infrastructure for 4-5 motorways totaling Rs. 40–50 crore. In order to diversify its revenue streams, BEL has also been concentrating on investigating the export (now mostly non-military) potential of defense electronics products and systems.
• The BEL plant in Pune has already established a lithium-ion battery unit and is in business negotiations with EV manufacturers. The business is capable of making batteries for two-, three-, and four-wheel vehicles. The business also intends to install e-mobility charging stations on five major motorways. With the help of contributions from EVMs and VVPAT, BEL's non-defense business is anticipated to contribute 25% of its sales by FY24E/FY25E, up from its FY23 contribution of 11%.
• One of India's largest defence PSUs, BEL, specialises in producing defence electronics and is emerging as one of the main gainers from the rise in capital spending on defence. Due to its dominant market share, track record, relationship with the military forces, established infrastructure and manufacturing facilities, and strong R&D skills, BEL enjoys an advantage over its rivals.
• The Government's expanding capital budget allocations and sustained emphasis on implementing enabling reforms to improve India's defence product production capability and gradually reduce imports strengthen BEL's potential to secure new orders.
• We have a positive outlook on the company due to BEL's well-established track record, significant production capabilities, excellent R&D foundation, big order book with high order prospects, and strong financial profile headed by zero debt, attractive return ratio, and improved profitability. In bull case target of Rs 170 over the next two quarters.

SOURCE:

-STOCX

-COMPANY WEBSITE