Stock Review: Bharat Electronics(BEL)

 

Bharat Electronics is likely to perform better in the near future on the back of a robust order book and better growth prospects

   BHARAT ELECTRONIC, or BEL, currently trades at almost the same levels as it did nearly a year ago, implying that it has underperformed the Sensex. However, a strong set of numbers, as reflected by the provisional results for FY11, a robust order book and prospective growth avenues point to a strong outlook for the company in the near term.Catering to the electronics requirements of the Indian armed forces, BEL, a navratna PSU, specialises in product segments such as radar, communication and electronic warfare. The defence sector currently accounts for over 80% of the company's total revenues. In the non-defence segment, the company's product range includes electronic voting machines (EVM), solar products, telecom and direct-to-home (DTH) devices among others.

 
   BEL's order book as at March 2011 stood at 23,600 crore, more than double its order position of about 11,350 crore a year ago. It translates into 4.2 times its standalone provisional revenues for FY11 providing it reasonable revenue visibility over the next few years.Moreover, the Budget allocation for FY12 to the defence sector increased almost 12% to 1.64 lakh crore while the defence capital acquisition and defence capex rose to 55,000 crore and 69,199 crore, respectively. BEL is expected to be the prospective gainer given its stronghold in the defence capex. It is also set to gain from the offset clause with many foreign vendors approaching BEL for partnerships to fulfill offset obligations. This is expected to boost its export revenues. The offset policy obliges foreign firms to have 30% contract from India. However, growing private participation in defence procurement (both in major and offset contracts) can dilute its future revenue prospects.

FINANCIALS:

The company's revenues for the quarter ended March 2011 rose more than 27% yo-y while its bottomline grew over 124% . For FY11, turnover rose 5% to 5,635 crore while profits grew 12% to 804 crore resulting in an improved EPS from 92 per share last year to 101. Having kept its input and staff costs in check, the operating margins of the company have improved by about 20 basis points during this period. Going forward, BEL aims to double its turnover to 10,000 crore by 2012-13. Given its strong order book position, this looks achievable, though timely execution remains a key concern.

VALUATIONS:

BEL currently trades at a price-earning multiple (P/E) of 17.9, which is reasonable given its cash rich and near zero debt status. Its consolidated cash balance as of March 2010 was over 3,500 crore which translates into 448 per share. The company has a healthy order book position, which is set to get healthier after the higher budgetary allocation to defence, giving the company a reasonable revenue visibility in future. We recommend a buy on the scrip at the current levels.

Key factors

Positives

• Outstanding orders in hand at the end of FY 11 more than doubled to 23,600 crore vis-à-vis a year ago

• Budget 2011 has increased the allocation to the defence sector by almost 12% to 1.64 lakh crore

• Impressive sales growth for the second consecutive quarter. Operating margins have improved considerably over the past few quarters

Negatives


• Competition from private players is set to increase given the govt's intent of involving private players in defence procurement

• There is an over-dependence on the defence sector

• Given the complex nature of defence deals, order execution tends to be slow