Bharat Elec­tron­ics Ltd

Money Times - - Stock Watch -

(BSE Code: 500049) (CMP: Rs.95.25) (FV: Re.1) (TGT: Rs.110+)

In­cor­po­rated in 1954, Ben­galuru based Bharat Elec­tron­ics Ltd (BEL) de­signs, man­u­fac­tures, sup­plies and ex­ports elec­tronic equip­ment and sys­tems for the de­fense and civil­ian mar­kets. Its de­fense prod­ucts in­clude de­fense com­mu­ni­ca­tion prod­ucts, land-based radars, naval sys­tems, elec­tronic war­fare sys­tems, avion­ics, elec­tro op­tics, tank and ar­mored fight­ing ve­hi­cle elec­tronic sys­tems, weapon sys­tems, shel­ters and masts, sim­u­la­tors and bat­ter­ies; mi­crowave tubes and power mod­ules, dig­i­tal mul­ti­chan­nel data recorders, hy­brid mi­cro cir­cuits; and mi­cro elec­tro me­chan­i­cal sys­tems. Its non-de­fense prod­ucts com­prise e-gov­er­nance sys­tems, home­land se­cu­rity prod­ucts, civil radars, in­te­grated traf­fic man­age­ment sys­tems, so­lar power so­lu­tions, tele­com and broad­cast sys­tems; strate­gic prod­ucts, sil­i­con ra­di­a­tion de­tec­tors, pas­sive vac­uum de­vices, anti-col­li­sion lights, mul­ti­chan­nel voice log­ging recorder sys­tems, dig­i­tal mul­ti­chan­nel data recorders, etc. In ad­di­tion, it of­fers elec­tronic man­u­fac­tur­ing ser­vices such as pre­ci­sion ma­chin­ing and fab­ri­ca­tion, op­to­elec­tronic com­po­nents and as­sem­blies, mi­crowave in­te­grated cir­cuit as­sem­blies, su­per com­po­nents mod­ules, cable as­sem­blies and wiring har­nesses, an­ten­nae man­u­fac­tur­ing ser­vices, etc. BEL re­ported a strong set of num­bers for Q2FY19. Key high­lights in­clude: a) higher de­liv­ery of VVPAT (Voter Ver­i­fi­able Pa­per Au­dit Trail) (civil busi­ness) led to a sharp 37% YoY rise in top-line, driv­ing strong op­er­at­ing lever­age; b) strong rev­enue vis­i­bil­ity with an or­der book of Rs.490 bil­lion (up 17% YoY) led by LRSAM (long range sur­face-to-air mis­sile) (Rs.92 bil­lion) and other projects driv­ing H1 or­ders at Rs.143 bil­lion (up 153% YoY). With sig­nif­i­cant op­er­at­ing profit mar­gin in H1 de­spite higher share of the civil busi­ness (vot­ing ma­chines), we ex­pect mar­gin to nor­malise in H2FY19 at 18.4% v/s 20.3% in H2FY18.

BEL re­ported 37% higher rev­enues, driven by timely de­liv­ery of vot­ing ma­chines (~12 bn in Q2FY19) ahead of the up­com­ing elec­tions. EBITDA mar­gin, which we ex­pect to nor­malise in H2FY19, jumped to 25% (man­age­ment guid­ance of 17-19% for FY19) on ro­bust ex­e­cu­tion which had led to bet­ter cost ab­sorp­tion. EBITDA jumped 44% YoY to Rs.8.5 bil­lion. PAT grew 39% YoY to Rs.5.7 bil­lion on ac­count of higher de­pre­ci­a­tion and lower other in­come (lower cash bal­ances).

Be­ing a ma­jor in­te­gra­tor, BEL is likely to sus­tain its com­pet­i­tive edge. We be­lieve that the re­cent cor­rec­tion in its share stock price (35% over the past six months) fac­tors in the struc­tural de­te­ri­o­ra­tion in mar­gin and RoE.

Tech­ni­cal Out­look: The stock looks good on the daily chart for medium-term in­vest­ment. It has formed a down­ward chan­nel pat­tern and may test the up­per end of the chan­nel. The stock trades be­low all im­por­tant mov­ing av­er­ages like the 200 DMA level on the daily chart.

Start ac­cu­mu­lat­ing at this level of Rs.95.25 and on dips to Rs.89 for medium-to-long term in­vest­ment and a pos­si­ble price tar­get of Rs.110+ in the next 12 months.

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