Strong beat on EBIDTA margin (~600bps better) enabled Bharat Electronics (BEL) post 10/21% higher EBIDTA versus our/consensus estimates in Q4FY16. Despite low revenue growth of ~7%, FY16 EBIDTA/PAT jumped 28/17% led by better product mix. The company’s FY16 order intake catapulted 3x to INR170bn led by 2 large projects (total INR99bn), propelling order book to INR320bn (up 48% YoY). BEL has been focusing on core competence—electronic systems, components—which coupled with sharpened focus on R&D & innovation imparts it a substantial competitive edge. Maintain ‘BUY’ with target price of INR 1,550 as we roll forward to FY18E earnings, estimating 13% EPS CAGR and reasonable 22% RoCE.
Execution of high value add projects aid OPMs; sales growth tepid
BEL posted a strong EBIDTA margin beat led by better–than-expected profitability in several large value executions like Akash missiles and high value ad radars which formed a major chunk of FY16 sales. Thus, despite lower–than-expected sales growth of 6%, FY16 EBIDTA jumped a strong 28% YoY driven by 300bps margin spurt. However, BEL missed its 8-10% revenue guidance for FY16.
R&D focus lends competitive edge; revenue visibility improves
While BEL’s order book catapulted 48% YoY to INR310bn, the company is eyeing sizeable value of projects going ahead both in its conventional areas (Akash, missiles etc) and several first-of-its-kind projects like TCS etc. Further, the company’s new R&D integrated centre at Bengaluru, we believe, is a step in the right direction as it reinforces its capability versus any possible threat/competition going ahead. We expect BEL’s revenue growth to pick up gradually with improved integration capability, execution and delivery of several key projects over the next 2-3 years.
Outlook and valuations: Attractive bet; maintain ‘BUY’
Despite an anticipated surge in private sector component players triggered by government’s thrust like IDDM and Make in India, we expect BEL’s position to strengthen as a lead integrator given its focus on and investment in core business. Rising capability of Indian private sector component players will complement BEL in a larger part of its business imparting a much higher growth. We maintain ‘BUY/SO’.
