Non-defence business may keep BEL buzzing

Order book, pipeline offer medium-term revenue visibility

The stock of India’s largest defence electronics firm, Bharat Electronics or BEL, has risen 20 per cent since its August lows on expectations that a strong order book, ongoing business diversification, and the government’s localisation efforts would drive mediumterm revenue growth.

After a recent analysts meet, brokerages such as CLSA revised their financial year 2022-23 (FY23)-24 earnings estimates by 2-6 per cent. The management is optimistic about a growth recovery in the rest of FY22 and has guided for mid-teen growth over the next three to four years.

The other key trigger for the stock is business diversification, which would reduce risk while offering growth opportunity. Analysts led by Amit Mahawar of Edelweiss Research say the non-defence foray has stronger merit and could lift its total addressable market and growth trajectory, thereby driving further rerating.

The company is looking to increase its share of nondefence revenues from 10 per cent currently to 25-30 per cent over the next few years. BEL received an order from Delhi Metro, which marks its entry into the railways/metro business, while in the medical equipment segment it is working with aggregators.

BEL is looking at scaling the software-as-a-service (Saas) business, which it started last year, to ~5,000 crore over the next three years. As the civilian projects are adjacent to and are modifications of its defence electronics base, the capex requirement is not significant. For the defence business, the company has chalked out a capex of ~1,800 crore over the next three years.

Higher non-defence projects will add to incremental revenues, but near-term growth drivers continue to be ongoing projects and order pipeline. Motilal Oswal Research highlights the company’s robust order backlog of ~55,800 crore in FY22 year-todate. This translates into an order book to revenue ratio of 4 times and offers the company a superior revenue visibility.

The firm’s order pipeline remains strong and it has bagged projects worth ~5,300 crore so far in FY22. It has maintained its FY22 guidance of ~15,000-17,000 crore on the back of expected orders related to missile systems, naval equipment, Smart City business among others.

Prabhudas Lilladher Research expects the company to post an annual revenue and profit growth of 17-20 per cent over the FY21-23 period on the back of a strong tender pipeline, comfortable order book, healthy execution and diversification into newer business. Most brokerages have a ‘buy’ rating on the company, which is currently trading at around 17 times its FY23 earnings estimates. Investors can consider the stock on dips.