BSE SENSEX
33,940
S&P CNX
10,417
Bharat Electronics
CMP: INR145
TP: INR196 (+33%)
Expect orders to spurt in FY19
Management targets to double sales to INR200b by FY23
We met BHE’s senior management team. Our key takeaways:
13 April 2018
Update | Sector: Capital Goods
Buy
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
BHE IN
2,437
193 / 138
-3/-19/-22
361.2
5.6
782.0
33.3
Akash and LR SAM orders deferred to 1HFY19
Financials Snapshot (INR b)
2018E 2019E 2020E
Y/E Mar
Net Sales
105.5 119.8 135.5
NP
16.1
17.9
19.2
EPS (INR)
6.5
7.3
7.8
EPS Gr. (%)
3.7
11.4
7.6
BV/Sh (INR)
39.3
43.5
48.1
RoE (%)
16.6
16.7
16.3
RoCE (%)
18.7
17.6
17.1
P/E (x)
22.4
20.2
18.7
P/BV (x)
3.7
3.4
3.0
Shareholding pattern (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
66.7
67.9
74.4
DII
16.5
16.1
15.8
FII
8.6
8.1
4.3
Others
8.2
7.8
5.6
FII Includes depository receipts
Stock Performance (1-year)
Bharat Electron
Sensex - Rebased
200
180
160
140
120
BHE received orders of INR100b (42% decline) in FY18, lower than our estimate of
INR160b primarily due to the Akash (7
th
Squadron) order slipping into 1QFY19. Its
order book at the end of the year was flat YoY at INR400b. Price negotiations for
the Akash order have been completed and BHE should receive the final order
shortly. The LR SAM order (INR60b-70b) is also likely to be placed by 1HFY19. Other
large orders in the pipeline include EW Samyukta (INR10b), Commander Thermal
Imagers, QR SAM and Akash (Army; two regiments). We estimate orders of
INR180b-190b in FY19.
Targeting 15% sales CAGR; EBITDA margin to sustain at 18%
Sales should grow at a CAGR of 15%, with BHE targeting to double sales to INR200b
in five years. EBITDA margin is likely to sustain at 18%, despite the execution of low
margin orders like electronic voting machines and LR SAM, as these will be offset
by higher margin orders like Akash missile systems. We note that 1HFY19 will have
a higher share of EVM supplies; so, margin during 1H19 could be low, but this will
be made up for in 2HFY19. Other income could decline, given the government’s
desire to receive higher dividends from cash-rich state-owned entities. Tax rate
(FY17: 24%) is likely to rise to 28% in FY19 and 31% in FY20.
Exports targeted to reach 10% of sales
Exports, primarily to neighboring countries, are a key focus area and can double
from the existing 5% of sales. These would typically occur under G2G contracts.
BHE is targeting Vietnam, Sri Lanka, Indonesia, Nepal and Myanmar in SE Asia.
Venturing into ammunition production; INR6b capex likely in FY18/FY19
BHE is venturing into the manufacture of ammunition; this is a logical extension,
given that it is already making fuses. It is also building two factories for (a) night
vision devices (INR3b), and (b) missile systems (INR5b).
Cutting estimates to factor in order deferral, higher tax rates
We cut our estimates for FY19/20 by 6% each to factor in deferral of large orders
and higher tax rates (31% in FY20 from 24% in FY17). Our target price is INR195
(25x FY20E EPS). Key triggers are accelerated decision-making toward large defense
procurements and increased indigenization. Maintain
Buy.
Ankur Sharma – Research Analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449
Amit Shah – Research Analyst
(Amit.Shah@MotilalOswal.com); +91 22 3029 5126
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Bharat Electronics
Exhibit 1: Missile systems timelines of awards
Description
Akash Missile Systems
Akash Missile Systems
Akash Missile Systems
LR SAM - IAI/BEL
Akash - 7th Squadron
QR SAM
Awarded
FY09
FY11
FY12
Q417
Q119
FY19
Service
Air Force
Air Force
Army
Navy
Air Force
Army
Source: Industry, Company
Exhibit 2: Overall Defense spending on major programs at INR15t over next decade
Description
Aircraft
Navy
Army
Integrated Security
Total (INR b)
INR t
5.2
3.5
6
0.3
15
Source: MOSL, Company
Exhibit 3: Indian Army acquisition plans at INR6.6t
Description
Artillery
Missile systems
UAV
Combat Vehicles/Tanks
Miscellaneous
Small Arms
Helicopter
Communication systems
Security Systems
Total
INR b
360
950
60
2100
1700
220
60
750
350
6,610
Source: MOSL, Company
Exhibit 4: Indian Navy acquisition plan at INR2.1t on major programs
Description
Landing Platform Docks
Corvette
Next Gen missile carrier
Indigenous Aircraft Carrier
P 75I Submarines
Total
INR b
200
175
120
900
1210
2,095
Source: MOSL, Company
13 April 2018
2

Bharat Electronics
Exhibit 5: Indian Air Force procurement at INR5.3t on major programs
Description
Single Engine fighter aircraft
Twin Engine fighter aircraft
Deck based fighter aircraft for Navy 57
UAV/Aerostats
AN32/Avro aircraft
Airborne Warning and control systems
Medium range maritime aircraft
Medium heavy helicopters
Light utility helicopters
Naval utility helicopters
Total
No
200
90
57
1000
150
6
15
200
600
111
Value
1,500
900
600
500
400
150
100
750
150
217
5,267
Source: MOSL, Company
Exhibit 6: Exports at ~5% of sales in FY17
Exports(INRm)
% of total sales
5.4%
3.3%
4.1%
3.0%
7.6%
4.9%
2.9%
1.2%
462
FY07
1.5%
610
FY08
1.8%
824
FY09
2.0%
1,067
FY10
1,617
FY11
1,879
FY12
1,782
FY13
2,510
FY14
3,645
FY15
5,695
FY16
4,290
FY17
Source: MOSL
Exhibit 7: Sales breakup for BHE
Description
Radar
Radio Communication
Optronics
Missile Systems
Communication Network Electronic Warfare Systems
Services
Non Defence - EVM, Solar
% of sales
20%
10%
10%
20%
15%
10%
15%
Source: Company, MOSL
Exhibit 8: Change in estimates
Description
Sales
EBITDA
Margin(%)
PAT
EPS
New Estimates
FY18E
FY19E
105,520
119,805
22,061
22,674
20.9%
18.9%
16,050
17,879
6.5
7.3
FY20E
135,478
25,502
18.8%
19,241
7.8
Old Estimates
FY18E
FY19E
112,367
124,778
23,872
24,493
21.2%
19.6%
17,354
19,081
7.1
7.8
FY20E
133,934
25,622
19.1%
20,380
8.3
FY18E
-6%
-8%
-0.3%
-8%
-8%
Change (%)
FY19E
-4%
-7%
-0.7%
-6%
-6%
FY20E
1%
0%
-0.3%
-6%
-6%
Source: MOSL, Company
13 April 2018
3

Bharat Electronics
Financials and Valuations
Income statement
Y/E March
Net Sales
Change (%)
Manufacturing Expenses
Staff Cost
Office & Site Establishment Exps
EBITDA
% of Net Sales
Depreciation
Interest
Other Income
PBT
Tax
Rate (%)
Adjusted PAT
EO Income (Net of Expenses)
Reported PAT
Change (%)
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Loans
Deffered Tax Liability
Capital Employed
Gross Fixed Assets
Less: Depreciation
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Debtors
Cash & Bank Balance
Loans & Advances
Other Current Assets
Current Liab. & Prov.
Liabilities
Provisions
Net Current Assets
Misc. Expenses
Application of Funds
E: MOSL Estimates
2013
61,038
5.8
41,739
11,108
1,767
6,425
10.5
1,307
8
6,100
11,210
2,248
20.1
8,962
-64
8,898
7.2
2014
62,755
2.8
40,241
10,304
3,299
8,911
14.2
1,421
34
4,285
11,741
2,431
20.7
9,310
6
9,316
4.7
2015
68,427
9.0
41,937
12,635
2,422
11,433
16.7
1,540
14
4,780
14,659
2,994
20.4
11,665
8
11,672
25.3
2016
73,278
7.1
42,670
12,573
4,319
13,716
18.7
1,722
45
5,371
17,320
4,248
24.5
13,072
0
13,072
12.0
2017
86,119
17.5
48,600
15,483
4,418
17,617
20.5
1,915
118
4,710
20,294
4,818
23.7
15,476
0
15,476
18.4
2018E
105,520
22.5
61,201
18,713
3,544
22,061
20.9
2,166
3
2,400
22,292
6,242
28.0
16,050
0
16,050
3.7
(INR Million)
2019E
2020E
119,805
135,478
13.5
13.1
73,081
83,996
20,161
21,711
3,889
4,269
22,673
25,502
18.9
18.8
2,491
2,816
0
0
5,000
5,200
25,182
27,885
7,303
8,644
29.0
31.0
17,879
19,241
0
0
17,879
19,241
11.4
7.6
(INR Million)
2019E
2020E
2,234
2,234
104,712
115,925
106,945
118,159
0
0
-3,000
-3,000
103,945
115,159
43,331
25,436
17,895
6,563
4,597
208,753
68,236
60,583
63,206
1,121
15,607
133,863
115,774
18,089
74,890
0
103,945
48,331
28,252
20,079
6,563
4,597
235,295
77,163
68,509
70,707
1,267
17,649
151,376
130,920
20,456
83,920
0
115,159
2013
800
62,429
63,229
0
-2,716
60,513
20,732
14,978
5,755
1,614
120
134,257
32,711
33,347
53,025
14,382
792
81,233
74,071
7,162
53,024
0
60,513
2014
800
69,498
70,298
0
-2,995
67,304
22,267
15,757
6,509
1,969
120
133,680
33,701
41,508
45,644
12,164
663
74,974
68,979
5,995
58,705
0
67,303
2015
800
78,141
78,941
0
-3,378
75,565
24,852
17,140
7,712
1,398
191
139,319
34,269
38,180
58,815
7,520
535
73,056
65,289
7,767
66,263
1
75,565
2016
2,400
87,484
89,884
0
-4,608
85,276
28,627
18,862
9,764
4,297
3,191
159,378
41,775
37,119
71,653
855
7,976
91,357
82,185
9,172
68,022
0
85,274
2017
2,234
72,937
75,170
167
-5,323
70,014
33,331
20,778
12,553
6,563
4,597
142,525
49,050
43,549
37,902
806
11,219
96,225
83,222
13,003
46,301
0
70,014
2018E
2,234
94,292
96,526
0
-3,000
93,526
38,331
22,944
15,387
6,563
4,597
184,881
60,100
53,360
56,687
987
13,746
117,902
101,970
15,932
66,979
0
93,526
13 April 2018
4

Bharat Electronics
Financials and Valuations
Ratios
Y/E March
Adjusted EPS
Growth (%)
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation (x)
P/E (standalone)
Cash P/E
EV/EBITDA
EV/Sales
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
RoIC
Turnover Ratios
Debtors (Days)
Inventory (Days)
Fixed Asset Turnover (x)
Cash flow statement
Y/E March
PBT before Extraordinary Items
Add : Depreciation
Interest
Less : Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Extra-ordinary Income
CF from Operations after EOI
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Investments
(Inc)/Dec in Networth
(Inc)/Dec in Debt
Less : Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2013
3.1
7.2
3.5
21.8
0.6
20
2014
3.2
4.7
3.7
24.2
0.6
20
2015
4.0
25.3
4.5
27.2
0.8
20
2016
5.0
23.2
5.6
34.0
1.5
31
30.5
27.0
23.9
4.6
4.4
1.0
14.2
15.0
-89.4
199
196
2.9
13.2
14.0
46.9
241
196
2.7
14.8
15.6
45.3
204
183
2.7
14.5
15.5
85.0
185
208
2.5
2017
6.3
27.2
7.1
30.6
2.3
36
25.4
22.6
20.2
4.3
5.2
1.4
20.6
18.8
88.4
185
208
2.5
2018E
6.5
3.7
7.4
39.3
2.3
36
22.4
19.8
13.8
2.9
3.7
1.6
16.6
18.7
61.4
185
208
2.7
2019E
7.3
11.4
8.3
43.5
2.6
36
20.2
17.7
13.1
2.5
3.4
1.8
16.7
17.6
51.9
185
208
2.7
2020E
7.8
7.6
9.0
48.1
2.8
36
18.7
16.3
11.4
2.2
3.0
1.9
16.3
17.1
49.8
185
208
2.8
2013
11,209
1,307
8
2,248
-19,994
-9,717
-64
-9,781
-2,439
-12,220
0
-2,439
-389
0
8
2,083
-2,481
-14,700
67,725
53,025
2014
11,740
1,421
34
2,431
-13,062
-2,298
6
-2,292
-2,530
-4,822
0
-2,530
-344
0
34
2,181
-2,559
-7,381
53,025
45,644
2015
14,659
1,540
14
2,994
5,614
18,831
8
18,839
-2,171
16,667
-71
-2,242
-684
0
14
2,728
-3,427
13,170
45,644
58,813
2016
17,320
1,722
45
4,248
11,080
25,919
0
25,919
-6,674
19,246
-3,001
-9,674
1,551
0
45
4,911
-3,404
12,841
58,815
71,656
2017
20,294
1,915
118
4,818
-12,031
5,479
0
5,479
-6,970
-1,491
-1,406
-8,376
-24,448
167
118
6,457
-30,856
-33,753
71,653
37,900
2018E
22,292
2,166
3
6,242
-1,892
16,328
0
16,328
-5,000
11,328
0
-5,000
14,325
-167
3
6,696
7,458
18,786
37,902
56,688
(INR Million)
2019E
2020E
25,182
27,885
2,491
2,816
0
0
7,303
8,644
-1,393
-1,529
18,978
20,529
0
0
18,978
20,529
-5,000
-5,000
13,978
15,529
0
0
-5,000
-5,000
0
0
0
0
0
0
7,459
8,028
-7,459
-8,028
6,518
7,501
56,687
63,206
63,206
70,707
13 April 2018
5

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
Bharat Electronics
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
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Disclosure of Interest Statement
Analyst ownership of the stock
Bharat Electronics
No
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registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in Hong Kong.
For U.S.
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered
investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption
under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional
Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional
investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule
15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S.,
MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of
this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject
to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal
Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the
Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced
in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in
this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of
independent judgment by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document
(including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including
those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy,
completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval.
MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform
investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this
into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and
the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or
published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such
distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all
jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall
be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees
to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSL
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring Centre, 2nd Floor, Palm
Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-38281085.
Registration details of group entities.: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser:
INA000007100.IRDA Corporate Agent-CA0541. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS
(Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers
Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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