Q1FY24 Review: Bharat Electronics: Favourable risk-reward

31 Jul 2023 , 11:39 AM

Bharat Electronics (BHE) started FY24 with strong inflows and operating profits, enhancing comfort and visibility on FY24 earnings. Management is confident of delivering 17% revenue growth in FY24 and sustain mid-teen growth in FY25 as well. Analysts of IIFL Capital Services forecast 16% revenue and 20% PAT Cagr in FY23-26, with RoE improving to 25%+ levels and average annual FCF of Rs35- 40bn. At 21x FY25 EPS, they believe BHE offers attractive riskreward, given its unique positioning in the domestic Defence Equipment market for both new equipment as well as upgrade opportunities. Analysts of IIFL Capital Services reiterate BUY and consider it among the top pick in the sector.

Front-ended inflows in FY24: 

Unlike FY23 where inflows were skewed towards the last fortnight of the year, FY24 is expected to witness front-ending of project awards. Apart from receipt of Rs40bn Akash from BDL, EWS for naval vessels (Rs20bn) and other orders contributed to healthy inflows of Rs81bn (40% of base guidance of Rs200bn for FY24). A combination of short cycle and large projects over the medium term (QRSAM in FY25, MRSAM, Avionics for HAL, P75i submarines, MAL drones etc., thereafter], will ensure 15%+ revenue Cagr over 3-5 years. 

Strong operating profits: 

Defying the popular perception of Non-defence being low-margin, BHE commenced supplies of EVM-VVPAT units (Rs8-9bn in FY24) and yet, reported 160 bps YoY increase in gross margins at 43.5%. Competitive costs for Non-defence projects and increasing share of localisation in large orders like LRSAM (55% level), and Akash (>90%) will aid healthy gross margins in FY24-25. 29% growth in Ebitda with healthy interest income aided 23% YoY in PAT. 

Credible bet with healthy RoE: 

With annual R&D spend of Rs10-12bn and capex of Rs7-8bn, BHE continues to drive localisation. Its lean cost structure and demonstrated track record in managing large system integration projects successfully — without hurting the balance-sheet or cashflows — make it a credible play on domestic Defence production. Healthy RoE of 23% and robust FCF profile ensure strong balance sheet.