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.

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

KRChoksey Views on Bharat Electronics, NALCO, Hindustan Zinc, Ashok Leyland

Bharat Electronics - Target of Rs 770


KRChoksey Research has recommended a buy Bharat Electronics with a target price of Rs 770 in its November 26, 2008 research report. "The revenue of Bharat Electronics increased by 10% (YoY) to Rs 787.72 crore (including other operative income of Rs 7.02 crore) for quarter ended September 2008. On back of rich cash reserves (Rs 307 per share), capacity expansion plans and diversified product portfolio, we give a BUY rating on the stock with target price of Rs 770," says KRChoksey's research report.


NALCO - Target of Rs 225


KRChoksey Research has recommended a buy rating on National Aluminium Company (NALCO) with a target price of Rs 225 in its November 26, 2008 research report. "Going forward, we believe the company is expected to perform better as commodities prices recover. The company is debt free company. It one of the Navratna company and has strong backward integration. Due to strong fundamentals of the company we give a buy with a target price of Rs 225," says KRChoksey's research report.


Hindustan Zinc - Target of Rs 504


KRChoksey Research has recommended a buy rating on Hindustan Zinc with a target price of Rs 504 in its November 26, 2008 research report. "Going forward, we believe the company is expected to perform better as commodities prices recover. HZL is the lowest cost producer of zinc in the world. It is sitting on huge cash and is a debt free company. It is slated to become the largest producer of zinc. Due to strong fundamentals of the company we give a buy with a target price of Rs 504," says KRChoksey's research report.


Mansukh Securities on Ashok Leyland - Target of Rs 25


Mansukh Securities and Finance has maintained its buy rating on Ashok Leyland with a target of Rs 25 in its research report. "Commercial vehicles sales have shown a downward trend in recent past. Moreover, in days to come, Ashok Leyland seems to have a tough stance to match its volumes in the segment."


"The company has recently increased its capacity and has similar plans for future, keeping this in view, the company is expected to carry excess capacity till the time the volumes are not increased. Also the demand for CV is expected to be dependent on factors such as growth in GDP and IIP, trends in interest rates, and availability of bank credit. Considering, the above factors we maintain our BUY rating on the stock by lowering our price target to Rs 25. Higher dividend yield should provide downside protection from current levels," says Mansukh Securities and Finance's research report.

Take Your PICK: Part III - SMALLCAP STOCKS

IPCA Laboratories (CMP: Rs 540): The company’s focus on branded formulations business and emerging economies is expected to be its key growth driver. New products launches in domestic and UK markets coupled with supplies to new emerging economies and US markets should lead to a compounded annual growth rate (CAGR) of 17% in revenues and 22% in profits over next two years. It is expected to clock an earning per share (EPS) of Rs 69.7 and Rs 82.6 for FY09 and FY10, respectively. Currently, the stock is trading at 7.5x FY09 and 6.2x FY10 earning estimates.

Numeric Power Systems (CMP: Rs 601): The company, a leading manufacturer of uninterrupted power supply (UPS) systems and power conditioners in India, commands 60% share in IT and 82% share of the ATMs. The strong demand for company’s products (India has peak power deficit of 16.6%), increased focus on high margin equipment servicing and significant international presence make NPSL a fast-growing multinational in the power management solutions. The stock is attractively valued at 6.5x FY09 EPS of Rs 94.2.

Indian Overseas Bank (CMP: Rs 91): The company is a leading South Indiabased bank with a strong balance sheet. IOB has a healthy current and savings account (CASA) ratio of 33.5% and strong return ratios, with a return on assets (RoA) and return on earnings (RoE) of 1.3% and 28%, respectively. The net profit for FY09E and FY10E is expected to be Rs 12.42 billion and Rs 13.91 billion, respectively, resulting in an EPS of Rs 22.8 and Rs 25.5 for FY09E and FY10E, respectively.

LIC Housing Finance (CMP: Rs 306): The company is expected to continue to benefit from the growing demand for housing. A lower mortgage/GDP ratio of 6% offers huge potential. The company expects 22% year-on-year (yoy) business growth to Rs 268 billion and 20% yoy growth in net profit to Rs 4.61 billion for FY09. Improving asset quality and strong return ratios augur well for LICHF.

Bharat Electronics (Rs 1,154): The company is the premier defence contractor for the government. Over the years, the company has developed several competencies in the area of defence electronics. It is expected to benefit from the defence offset clause that the government mandates for import of defence equipment above Rs 3 billion. The order backlog is comfortable at Rs 94.5 billion and equivalent to over two years of FY08 revenues. The modernisation of the Indian defence sector is expected to throw significant opportunities for BEL.

Source: Kotak Securities