Maintain ‘buy’ on Bharat Electronics, target R1,600

BHARAT Electronics (BEL) released a presentation post its press meet with FY16 performance highlights. R&D spend has risen to an all-time high of 10% of sales in FY16. As many as 12 new patents have been filed. R6- billion FY16 capex gives confidence in management executing planned R20 billion over 3-4 years for a missile facility and upgradation. Maintain ‘Buy’ with a revised TP of

R1,600 as we rollover to 24x PE FY18E vs FY17E.

Our key investment thesis has been the rise in domestic manufacturing adding to the market pie. India’s defence foreign procurement has declined by 29% y-o-y in FY15 and 10% y-o-y in FY16. 48% of the $28 billion ordering in the last 18 months will be manufactured domestically, vs. the last 5-7 year run-rate of 30% levels. New defence procurement policy introduced in March 2016 prioritises domestic content procurement v/s foreign purchases. BEL’s FY16 order flow has risen 3.3x y-o-y to R171 billion and order book is up 50% y-o-y to

R320 billion. Management indicated that strong order book growth is sustainable from a medium-term perspective.

Electronic warfare systems, Akash Missiles, Advanced Composite Communication systems are expected to drive FY17E order flow. $12-billion Tactical Communication Systems is also listed as a potential order in FY17E, which could be a game-changer for BEL.