Bharat Electronics (BEL)

Considering the growth potential, expertise and recession-proof nature of its order book, Bharat Electronics can be expected to record profit growth of 25-30% p.a. over the next few years. Investors with a time frame of 2-3 years can consider taking exposure in the stock

BHARAT Electronics (BEL) is a public sector enterprise with 76% government ownership. The Bangalore-based company is country’s premier manufacturer of electronics products and components for the defence sector. Even though the stock has nearly doubled in last six months, it is still trading at an attractive valuation. Considering the growth potential, its expertise and recession proof nature of its order book, the company can be reasonably expected to record profit growth of 25-30% over the next few years. Investors with a time frame of 2-3 years can consider taking exposure in the stock.

COMPANY’S BUSINESS:

As the name suggests, BEL is an electronics manufacturer and mainly caters to the defence needs of the country. It makes communication devices like radars & sonars. Besides that it makes telecommunication and broadcast equipment, electronic voting machines and e-governance network, among others. While most of its revenues come from meeting the needs of defence sector, in recent years the company has been creating a market potential for its various product and systems in non-defence sectors, such as, for civil aviation, oil & gas and railways, among others. The share of non-defence continues to remain low at 15% of the sales, which the company targets to take up to about 30%. Its civilian product portfolio includes items, such as, high frequency communication sets, transceivers, radio relays, fire control systems, communication systems for various ships and yards, air traffic control surveillance, 3D surveillance radar, night vision binoculars, satellite based mobile communication system and electronic voting machines. It is also into solar products, where it is serving the needs of individual and private organisation also.

The company’s market is relatively protected from foreign and domestic competition owing to the sensitive nature of the products, and the threat for orders drying up is low. This business offers a high potential, with increasing importance of renewable source of energy, and the developing stage of technology for the product. The entry into non-defence market is significant as the company has a high degree of technical and manufacturing expertise, which it can leverage to become a leading supplier of high-end electronic systems to the civilian sector. Unlike many of its competitor, the company is an integrated manufacturer of most of the electronic components that go into the final product. This lowers its cost and significantly improves its profitability.

While the company’s product line continues to remain protected, the defence sector is progressively being opened to private players and foreign competitors. Still, the downside of this to BEL is limited and it has actually helped the company improve its operations through various efforts related to quality, cost control and so on. The company has also focussed on improving the product development and delivery cycle time, to match the international standards.

Among other growth initiatives, BEL is now focussing on focus on exports, indigenisation of imported systems and exploring new segments in the domestic market. The company is also actively exploring various JV especially with foreign players for domestics as well as foreign market. Further, newer high-growth areas such as solar energy and egovernance provide good upside potential and they share complementarities with its exiting businesses. It has also identified areas for further exploration such as homeland security and nuclear power Instrumentation, where there is significant scope for the company, more so because of its public sector status.

FINANCIALS:

The company net profit grew at a compounded annual rate (CAGR) of 22% during three years ending March 2008, much faster than 10% CAGR growth in its net sales. While it managed to grow sales by nearly 13% in FY09, profitability took a knock leading to 9.6% decline in net profit. This was mainly due to 47% increase in raw material cost, impacted due to depreciation in rupee, as 70-80% of its raw material is imported.

However, it has managed a turnaround in H1’FY10 recording sales of Rs 2219 core, an impressive increase of 88% year-on-year. With relatively lower growth of 62% in raw material cost, the company managed to improve its operating margin by as much as 10 percentage point. With a marginal growth of 1% in total other costs; company managed to register profit of Rs 310 core, an impressive growth of 146%.

VALUATIONS:

While the profit growth of 150% in H1’10 is not sustainable, but it has enough capability to sustain growth rate of 25%, at least over the next few years. Since, the defence continues to remain a priority for successive government, its core business area remains unaffected by the economic ups and downs. Further, the diversification into non-defence market will help it shore up the volume further, even though the margins may not be as good as in the defence market. The stock is trading at an attractive priceearnings ratio of 15 times its trailing earnings and is an attractive proposition for investors with a medium term outlook.

Bajaj Electrical

Bajaj Electrical a good buy on dips

BAJAJ Electricals is probably one of the best performers in recent years in the portfolio of companies that form part of the Bajaj Group, one of the oldest business houses in India. The company has shown consistent growth in revenues in the past five years.

BUSINESS:

Bajaj Electricals is a 71-year old company and operates in three major business segments — consumer durables, lighting and Engineering and Products (E & P). In the lighting segment the company manufactures and sells lamps, tubes and luminaries (light fittings) while appliances and fans are produced and sold through the consumer durable segment. E & P includes manufacturing, erection and commissioning of transmission line towers, telecommunications towers, highmasts lighting, poles and special projects, including rural electrification projects. At the end of FY09, the company’s rural electrification business received four major orders from an NTPC subsidiary, National Electric Supply Company Limited (NESCL) and National Hydro Power Corporation (NHPC) totalling Rs 360 crore. Export of all BEL’s products except of its engineering and projects business unit is taken care of by group company Bajaj International. Out of all the business units, the consumer durable segment is the biggest contributor to the revenues and profits, followed by the E&P and lighting segments.

FINANCIALS:

In last five financial years the company’s topline grew at compounded annual rate of 28%. After sluggish year on year growth in revenue for the quarter ending June’09, for the latest quarter net sales rose by 35% compared to the previous year. While the lighting division experienced a decline in revenue for the second quarter of this fiscal, it recovered by expanding by 15% in the latest quarter. The company’s operating profit and net profit posteda CAGR of 88% and 60% in the last five financial years. The profit margins, considered on a trailing year basis, have also improved since the quarter ending December’09. The company showed a healthy annually compounded growth of 53% in cash profit since FY05 while the dividend paid also grew at a CAGR of 61% during the period.

GROWTH PROSPECTS:

While the consumer durables segment is expected to continue its r contribution to total revenues, the company expects the E&P business units to act as a growth engine. Besides the rural electrification projects, Bajaj Electricals is also associated with the entire chain of power generation, transmission and distribution for the Commonwealth Games 2010. The company’s balanced business portfolio, which is both consumer centric and infrastructure oriented is expected to boost future growth.

VALUATIONS:

The company’s stock has outperformed the Sensex in the last five months and its market capitalisation has more than doubled in the last two years. At the current market price the P/E ratio is 12, a little above its average of 10 during the period. Given the growth prospects of the company and dividend payout strategy the stock is a good buy on dips.

Bharat Electronics Limited

Profile

Bharat Electronics Limited (BEL) is the manufacturer of a wide array of products, which can be broadly classified into 8 core business groups —radars and sonars, communication, electronic warfare systems, electro optics, tank electronics, telecommunication & broadcasting, components and turnkey solutions.

Though BEL is the market leader in this segment still it is increasingly facing difficulty in procuring advanced technology in defense space as the foreign companies are more keen to come into this segment themselves by tying up with local partners. Though there might not be any mass flight of customers (defense establishment is under government control), but lack of advanced technology would compromise its future growth.

Fundamental Performance

Being in a niche sector, and protected by barriers raised by the government, BEL has flourished over the years. Over the past 5 years the company had seen a steady rate of growth in profits of 20 per cent per annum. It is virtually a debt-free company, with very low capital expenditure. A limited working capital requirement has allowed it to operate with a positive cash flow. At the end of the previous fiscal it had close to Rs 3,700 crore in its reserves. The weakness outlined by the company in its annual report, which plagued all PSU companies at one point of time or other, may be a matter of concern for investors.

Stock Performance

Over the past 5 years the stock has given gains of 21 per cent per annum. With an yield of 1.35, the stock is trading at a PE of 12.57. Its 5-year median PE is 14.31, that is, the stock is trading 12 per cent below its historic trading level. With pending orders close to Rs 10,000 crore, the company is assured of earnings visibility in coming quarters. Coupled with cash on its books of Rs 330 per share, (which is almost 25 per cent of its current market price) and a market dominance of over 57 per cent, the stock can be considered as a value pick at these levels.

History

BEL was set up by the Government of India under aegis of Ministry of Defence in 1954 to manufacture transreceivers. Today, it has evolved into a multi-product, multi-technology, multi-unit company in the field of defense and electronics.

Stock views on Jaiprakash Associates, Jubilant Organosys, Bharat Electronics

Bonanza on Jaiprakash Associates - Target Rs 96

Bonanza has recommended a buy rating on Jaiprakash Associates with a target of Rs 96 in its research report. "The company's net sales were at Rs 1380.6 crore versus Rs 942.88 crore. Its other income was at Rs 66.5 crore versus Rs 58.7 crore. Its operating profit was at Rs 306.2 crore versus Rs 265.91 crore. Its OPM % was at 22.18% versus 28.2%. We recommend investors to buy on the counter with a target of Rs 96 in the medium term," says Bonanza's research report.


Emkay Global on Jubilant Organosys - Target Rs 187

Emkay Global Financial Services has maintained its buy rating on Jubilant Organosys with a target price of Rs 187 in its research report. "Jubilant Organosys Q3FY09 revenue was up by 42% to Rs 9.1 billion, in line with our expectations. Robust growth in revenues is driven 54% growth in Pharma and Life science (P&LS) on the back of 81.6% and 49.6% growth in DDDS and CRAMS segment. We maintain BUY with a target price of Rs 187," says Emkay Global Financial Services' research report.


Indiabulls Securities on Bharat Electronics - Target Rs 994

Indiabulls Securities Research has downgraded its rating on Bharat Electronics (BEL) from buy to hold with a target price of Rs 994 in its research report. "Bharat Electronics Limited (BEL)’s Q3’09 revenue moved up a meager 1.8% yoy to Rs. 6.84 billion, compared with a 10.1% yoy growth in the last quarter. Given the slow execution rate in 9M’09, we have reduced our revenue target for FY09 from 8.4% to 6.8%. However, we have upwardly revised our revenue target post FY10 as we believe the current concerns relating to the domestic security should significantly increase the demand for defence and security equipments. Consequently, we have increased our target price from Rs. 816 in our last report to Rs. 994, based on the DCF valuation and assuming a 16.2% WACC and a 5% terminal growth rate. Therefore, we have downgraded our rating from Buy to Hold," says Indiabulls Securities' research report.

Stock views on Glenmark Pharma, Shree Cements, Bharat Electronics

Asit C. Mehta on Bharat Electronics - Target Rs 1037

Asit C. Mehta has initiated a buy rating on Bharat Electronics with a target price of Rs 1037 in its research report. "We have valued the stock using the price to book value multiple. Historically, the stock has traded at a discount of approximately 30% to the price to book value multiple of its foreign peers. This could be mainly due to the large size of its peers. Therefore we have assigned a Price /Book Value multiple of 1.8 (which is consistent with the valuation of its foreign peers) to the FY10 book value of Rs.579.5. We, therefore initiate coverage on Bharat Electronics Ltd with a “BUY” recommendation for a target price of Rs 1037," says Asit C. Mehta's research report.


SKP Securities on Shree Cements - Target Rs 900

SKP Securities has maintained its buy rating on Shree Cements with a target of Rs 900 in its research report. "Net sales were up by 25.6% to Rs 665.4 crores in Q3FY09 over Q3FY08. PAT up by 269% on y-o-y basis at Rs 129.3 crores in Q3FY09. We maintain our BUY recommendation on the stock with a target price of Rs 900 at 8x FY10E earnings in 12 months against the current valuation of 4.5x FY10E earnings," says SKP Securities' research report.


ULJK Securities on Glenmark Pharma - Target Rs 191

ULJK Securities has maintained its buy rating on Glenmark Pharma with a target of Rs 191 in its research report. "Net revenue of Rs 5813.9 million was 39% short of our estimate while EBITDA saw a sharp decline of 47% YoY mainly on account of sharp currency devaluation and delay in US product approvals. We believe that the company’s growth will be hampered because of global slowdown and increasing interest rate scenario. We cut our EPS target for FY10 by 27% and reiterate a Buy with a target price of Rs 191 (from Rs 430)," says ULJK Securities' research report