Bharat Electronics Ltd
(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.