20 March 2015
Update | Sector: Capital Goods
Bharat Electronics
BSE Sensex
28,261
S&P CNX
8,571
CMP: INR3,189
TP: INR3,950
(+24%)
Buy
Strongly positioned for
‘Digitized Warfare’
Stock Info
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val(INRm)/Vol‘000
Free float (%)
Expect near doubling of order intake in FY16E/17E
BHE IN
80.0
255.1/4.1
4,140/982
-10/45/182
544/209
25.0
n
n
Financial Snapshot (INR b)
Y/E Mar
2015E 2016E 2017E
Net Sales
73.9
82.6 90.8
EBITDA
NP
EPS (INR)
EPS Gr. (%)
BV/Sh.INR
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
12.6
12.3
154.3
32.6
997
15.5
11.0
22.0
3.4
15.2
14.4
16.7
15.9
11.9
18.9
3.0
16.5
15.8
9.8
n
180.1 197.8
1135 1287
15.4
11.5
17.2
2.6
n
Recent years have witnessed increased importance of network-centric warfare
(NCW), need for large scale deployment of Weapon Systems and technological
advancements in Electronic Warfare. This triad opens up interesting possibilities
for Bharat Electronics (BHE). Pertinently, most of these projects need to be
developed indigenously, given the strategic requirements.
BHE is uniquely positioned in several of these platforms and technologies in
“Digitized Warfare”, given in-house capabilities (R&D spend at 7.6% of revenue)
and relationships with defence/government agencies. We expect meaningful
traction in order intake from these segments, including i) Integrated Air
Command and Control System (INR70b, BHE is the preferred bidder), ii) Electronic
Warfare (~INR60b) and iii) Akash Missiles (~INR30-50b). Hence, we expect BHE to
report an order intake of INR88b in FY16E / INR92b in FY17E, a near doubling
from the levels of INR42-49b in FY14/FY15E.
BHE has recently commissioned a new software development center at Bangalore
to augment NCW systems’ capability. Also, it is augmenting manufacturing
capacity of weapon systems by setting up a greenfield unit in Andhra Pradesh.
Maintain Buy, with a target price of INR3,950 (20x FY17E).
Exhibit 1: Expect meaningful traction in project awards for BHE from
‘Digitized Warfare’
Systems
(INR b)
Highlighted areas indicate possible project awards to BHE in FY16/17E
Source: Company, MOSL
Satyam Agarwal(AgarwalS@MotilalOswal.com);+91
22 3982 5410
Amit Shah(Amit.Shah@MotilalOswal.com);+91
22 3029 5126
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Bharat Electronics
Strongly positioned for
‘Digitized Warfare’
Please refer our detailed
report “Battle ready”
in September 2014
Expect near doubling of order intake in FY16E/17E
Recent years have witnessed the spiraling importance of network-centric warfare
(NCW) that utilizes digitized operational assets to leverage information. Also, large
scale development of Weapon Systems (including indigenous missile development
programs) and Electronic Warfare unveils interesting possibilities for BHE.
Significantly, most of these projects need to be developed indigenously, given the
security requirements to control strategic communication and information network.
BHE is strongly positioned in Defence Electronics; expect near doubling of
order intake in FY16E/17E v/s FY14/15E
BHE is the leader in Defence Electronics in India, with a share of 50%+. It is uniquely
positioned in several of these emerging platforms and technologies in “Digitized
Warfare”, given in-house R&D capabilities (R&D spend at 7.6% of revenue) and
relationships with defence/government agencies. BHE derives 85% of the revenue
from indigenously developed products, including 44% from products developed in
association with DRDO etc. We expect meaningful traction in order intake from
these segments, including from i) Integrated Air Command and Control System
(INR70b), where BHE is the preferred bidder, ii) Electronic Warfare Systems
(~INR60b), including for Fighter Aircraft, Mountain Terrains etc and iii) Akash
Missiles, with Indian Air Force possibly requiring for another 25 squadrons in a
phased manner etc. We thus expect BHE to report an order intake of INR88b in
FY16E/INR92b in FY17E, a near doubling from the levels of INR42-48b in
FY14/FY15E.
Pertinently, most of these
projects need to be
developed indigenously,
given security requirements
to control the
communication and
information network
Exhibit 2: Expect BHE’s order intake to nearly double in FY16E/17E v/s FY14/FY15E levels
Order Intake (INR B)
Order intake
supported by
Akash Missiles
(INR65b)
177
Key orders expected:
i) Integrated Air
Command and Control
System (INR70b)
78
52
42
49
88
92
ii) Electronic Warfare
Systems (~INR60b)
iii) Akash
Missiles, from Indian
Air Force (~INR30-50b)
22
20
31
52
64
24
26
40
45
54
61
Source: MOSL, Company
20 March 2015
2

Bharat Electronics
Exhibit 3: BHE has a dominant share in Defence Electronics
BEL Defence Revenues (INR b)
BEL Share (%) in strategic Defence Electronics
59.1%
57.7%
63.5%
58.0%
57.6%
50.8%
57.0
Exhibit 4: Defence/Strategic Electronics at inflexion point
Defense Electronics (INR b)
85.0
10.4%
5.9%
% YoY
90.0
102.6
49.5%
68.4
20.0%
69.8
2.0%
77.0
10.3%
14.0%
33.7
FY08
39.5
FY09
44.3
FY10
44.7
FY11
42.1
FY12
51.9
FY13
52.1
FY14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Dept of Electronics and Information Technology
Source: Dept of Electronics and Information Technology
Exhibit 5: BHE’s revenue composition
Exhibit 6: BHE’s order book composition
Exports, 5%
Civilian,
10%
Army,
42%
Others,
22%
Electro
optics, 7%
EW &
Avionics,
Communica
8%
tion , 15%
Radar / fire
control,
33%
Airforce,
22%
Weapon
system,
15%
Source: Company (FY13)
Navy, 26%
Source: Company (FY14)
BHE expands capacity to manufacture NCW/Weapon systems
BHE has been designing and
developing various NCWs
for the last 10 years. Many
of these programmes have
successfully undergone test
bed evaluations and are
operational
Over the years, BHE made significant investments to create infrastructure and
facilities to manufacture NCW systems. Recently, the new software development
center was inaugurated at Bangalore that will house 500 software engineers
specializing in various net-centric technologies and projects for the armed forces.
To augment Weapon Systems’ manufacturing capacity, BHE will procure ~1,000
acres of land at Lepakshi Zone in Ananthpur district of Andhra Pradesh. Company is
in advanced talks with the state government to acquire land for the proposed
greenfield plant. Investment for this plant is ~INR5b and the facility is likely to be
operational in the next two years. The new facility will be a specialized one being set
up to manufacture various weapon systems such as fire control, missile systems and
weapon upgrade programme among others.
20 March 2015
3

Bharat Electronics
Digitized Warfare:
Key upcoming projects
#1. Network Centric Warfare
§
Integrated Air Command and Control System (IACCS)
is an automated air defence command and control system
to control and monitor air operations by the Indian Air Force over an IP-based wide area network. This C4I
(Command, Computer, Control, Communication and Intelligence) system offers seamless air operations across
Area of Responsibility for the entire air space of the country.
IACCS, which when completed, will link various
airborne platforms, ground-and space-based sensors, Surface to Air Missile (SAM) systems, air bases and
enable them to exchange secure voice, data and real-time pictures through an ‘Operational Data Link’.
§
Air Defence Control and Reporting System (ADC&RS)
is a tactical command, control, communication and
intelligence network for army-air defence to detect hostile targets far off from the assets of national interest and
neutralize them through optimal weapon assignment. The programme is being developed and implemented in a
phased manner. The technologies involved in this programme are multi-sensor tracking, point to multi-point
VHF/HF communication and real-time GIS.
#2. Missile Projects
§
§
§
§
§
Akash Missiles
are already in use with the Indian Air Force, with two squadrons in service and six on order; Army
will also induct two regiments of the missile. Akash Missile has received orders in excess of INR250b and is
among the most successful projects by DRDO. Further orders are likely and an improved Akash MkII is now on
the cards.
The
Long Range Surface to Air Missile
(LRSAM) is being jointly developed by DRDO and Israeli Aircraft Industries
and was successfully test fired in November 2014. Another Home on Target test is planned to take place in April
2015. The project is now expected to be completed by 2016.
The
Medium Range Surface to Air Missile
(MRSAM) is also being jointly developed by DRDO and Israeli Aircraft
Industries, for use by Indian Army and Indian Air Force.
Brahmos
missile has been developed jointly with Russia and has been in service with all three forces. The first
launch of the 290kms air launched Brahmos is expected to take place in April 2015. Carriage trials have been
underway for some time now and an air-launched Brahmos is likely to be inducted in IAF within the next two
years.
Beyond Visual Range Air to Air Missile (BVRAAM) has
been in development for more than a decade and is now
scheduled to complete development work by December 2016. Trials on IAF Su-30 MKI aircraft are now
underway.
#3.
‘Make’
Category projects
“Make” Category projects entail high technology complex systems that are required to be designed, developed and
produced indigenously. Initially, the selected bidders are needed to develop the prototype, with 80% of the R&D
cost being funded by the government. Since its introduction as a part of the Defence Procurement Policy in 2006,
not a single “Make” Category project has been awarded till date.
In February 2015, the Ministry of Defence selected two development partners for the INR500b Battle Field
Management System (BMS) project, including consortiums by: BHE-Rolta and Tata Power SED – L&T. The BMS as
applicable to the Indian Army is a command and control system providing real/near real time situational awareness
as also information exchange for unit commanders and below down to individual soldiers/platforms to enable
optimal management of resources within the Tactical Battle Area.
Also, few more projects like Tactical Communication System, Future Infantry Combat Vehicle etc are expected to be
decided, possibly in FY16/17.
20 March 2015
4

Bharat Electronics
Capex is likely at INR2.5-3b pa; large projects like missiles etc will entail incremental capex
Exhibit 7: Steady infrastructure creation over the years
Gross Fixed Assets (INR m)
Capex (INR m)
Exhibit 8: Expect FA turnover ratio to improve as execution
picks up
Fixed Asset Turnover Ratio
3.0
3.1
3.0
2.9
2.7
3.1
3.3
3.4
Source: MOSL, Company
Source: MOSL, Company
Exhibit 9: BHE - Key manufacturing facilities
Bangalore
Military communication equipment, network centric systems, military radars, navel systems, electronic
warfare(air force), avionics, weapon system, telecom and broadcast system, components, coastal surveillance
system, electronic voting machines, solar products, traffic signals, security systems, microwave super
components.
Network centric systems, radars, antennae, satcom (defence), microwave components
Military communication equipment, encryption products
Telecommunication systems, military communication systems
X-ray tubes, batteries and laser products
Shelters and masts
Electronic warfare systems
Electro optics ( nights vision devices)
Tank electronics, gun upgrades
Source: MOSL, Company
Ghaziabad
Panchkula
Kotdwara
Pune
Navi Mumbai
Hyderabad
Machilipatnam
Chennai
R&D expenditure: Target to increase to 10% of revenue
To improve indigenization, adapt to upcoming technologies and maintain its
leadership position in the fast evolving Defence Electronics market, BHE is
emphasizing on R&D (FY14 spend at 7.6% of net sales).
Key challenges in R&D are: i) rapid product obsolescence and hence it is important
to keep updated with new technologies, ii) BHE has a portfolio of 350 products and
it is critical to nurture and maintain these products for 30-40 years and iii) need for
technological tie-ups (to improve the indigenization levels, enter new products etc).
Over the years, company has migrated to a system level R&D and is now looking for
collaborative R&D. This can be a vital entry barrier for any private sector player.
Also, we believe that BHE stands a better chance to tie up with foreign players
eyeing to enter India, given the inherent strengths of infrastructure created and
R&D competencies.
20 March 2015
5

Bharat Electronics
Exhibit 10: BHE has enhanced R&D spending (% of revenue) / Exhibit 11: BHE’s revenue composition: Higher proportion of
R&D manpower meaningfully since FY09
revenue from indigenously developed products
R&D (% Revenues)
R&D Employees
3991
3670 3696 3869
27%
19%
Indigenous
40%
17%
25%
25%
ToT
22%
19%
22%
15%
2553 2558
2790
3025 3177
3420
60%
4.0
3.7
3.5
5.1
5.3
6.1
7.0
8.2
8.5
7.6
73%
81%
83%
75%
75%
78%
81%
78%
85%
Source: Company, MOSL
Source: Company, MOSL
Exhibit 12: BHE: New products developed/introduced
Year
Products
Coastal Surveillance System
Tablet PC
Integrated anti submarine warfare complex
Advanced torpedo defenve system
Digital radio trunking system
Upgraded indigenous forward observer simulator
Electro optic fire control systems
Integrated radio line modem
Remotely operated vehicle
Thermal imaging camera for fly catcher radar
National Command Control Communication and Intelligence Network (NC3I)
Mobile Cellular Communication System
Passive Night Vision Devices with XD4 technology
ESM system for small ship
Point to Multi Point Radio and mast for LORROS
3D Tactical Control Radar
Low Level Light Weight Surveillance Radar (Bharani)
Missile Approach Warning System
Printing attachment to EVM to facilitate comparison of votes in event of disputes
EVM with new specifications incl digital certification and tamper proof mechanism
Hull Mounted Sonar
Source: MOSL, Company
FY13
FY14
20 March 2015
6

Bharat Electronics
Exhibit 13: Technology tie-ups/MoUs signed by BHE
Company
Oerlikon Contraves, Switzerland
Norcontrol, Norway
Northrop Grumman, USA
ELTA, Israel
INROS, Russia
Matra Defence Equipments & Systems,
Sextant, France
ELBIT, Israel
Ericsson, Sweden
Elopotro, South Africa
Signaal, The Netherlands
Thompson Tube Electronic, France
Optelian International Corp
Thales, France
Elbit Systems Intelligence and Electro-
TCOM, USA
Textron Systems
Sagem, France
Israel Aerospace Industries
Elbit Systems Intelligence and Electro-
Optics
Products
Naval FC Systems
Radar Scan Convertor
Airport Radars
Battle Field Surveillance Radar
Sonobouys
Electric Drive system for Tanks
LCD display unit
Stand alone communication unit
Radio Relay System
Laser Range Finder
Fire Control Radar
TWT
Manufacture & Design of optical networking systems in India
Radars for select defence and civilian applications
Compact Multi Purpose Advance Stabilization System
Aerostat Surveillance and Communication System
Unattended Ground Sensor (UGS) system
Navigational Sensors like periscope, Inertial Navigational
Long range Surface to Air Missile ship-defence systems
Licensed collaborated manufacturing and D-Level
Maintenance of Compact Multi-Purpose Advanced Stabilized
System for the Advanced Light Helicopter Program
Source: MOSL, Company
20 March 2015
7

Bharat Electronics
Expect 13% revenue CAGR, 29% intake CAGR over FY14-17
We expect BHE to report 13% revenue CAGR over FY14-17, largely supported by
execution of the Akash Missile project. During FY11/12, BHE received orders of
~INR65b for Akash Missiles and execution had been delayed. With successful test
firing for the Indian Air Force in FY13 / Indian Army in FY14, execution has picked up
in FY15, and the trend should continue in FY16. Improved execution will support
EBITDA margin (expect 400bp expansion during FY14-17), aided by lower staff cost
(expect 180bp decline), and lower provisions (expect 214bp decline, FY14 provisions
at INR3b included INR1.4b towards MTNL). We expect gross margins to be
maintained in a range (42-43%) and are supported by increased contribution from
high margin businesses. We expect net profit to grow at a CAGR of 19% over FY14-
17.
Net working capital (NWC) is likely to deteriorate – being the lead integrator, BHE
had received advances on the Akash Missile project in FY11/FY12, leading to a surge
in cash balance and negative reported NWC.
Expect revenue CAGR of 13%, led by Akash Missile execution
Exhibit 14: Expect revenue CAGR over FY14-17 at 13%
Revenues (INR b)
YoY (%)
Expect
acceleratio
Constrained
execution
Exhibit 15: Execution of Akash Missile to normalize BTB
Revenues (INR b)
Akash Missile order in
FY11/12 of INR65b
YoY (%)
Source: Company, MOSL
Source: Company, MOSL
Gross margin to remain stable; EBITDA to expand 400bp
Exhibit 16: Expect gross margin to be stable, EBITDA margins Exhibit 17: Employee strength cut by ~45% from peak levels
to expand
in FY01; to support margins
Gross Margins (%) LHS
60%
45%
30%
15%
0%
EBIDTA (%)
30%
23%
15%
8%
0%
26.0%
22.0%
18.0%
14.0%
10.0%
Staff Costs (% of Revenues)
Employees (Nos)
16000
14000
12000
10000
8000
Source: Company, MOSL
Source: Company, MOSL
20 March 2015
8

Bharat Electronics
Reported NWC to deteriorate, largely due to execution of Akash Missile project
Exhibit 18: Customer advances to decline sharply as % of
revenues, but to be stable as % of order book, impacting Exhibit 19: Volatility in FY11/12 in NWC / cash was due to
NWC
advances on Akash Missile project
% of Order Book
40%
30%
20%
10%
0%
% of Revenues
160%
120%
80%
40%
0%
450
300
150
0
-150
NWC (Days)
Net Cash (INR B)
80
50
20
-10
-40
Source: Company, MOSL
Source: Company, MOSL
Exhibit 20: Core NWC to improve; however reported NWC to deteriorate as customer advances decline (Days)
Inventories
Debtors
Loans and Advances
Other Current Assets
Total Current Assets
Creditors
Other Current Liabilities
Provisions
Total current Liabilities
Core NWC
Customer Advances
Reported NWC
FY09
190
179
39
0
408
76
13
44
88
320
237
83
FY10
168
149
30
0
347
55
8
37
64
283
241
43
FY11
161
189
35
1
386
55
20
37
75
311
421
-110
FY12
177
170
106
4
457
68
24
37
92
365
454
-89
FY13
196
199
86
5
486
67
23
43
90
396
353
43
FY14
196
241
71
4
512
70
25
35
95
418
307
111
FY15E
190
225
80
4
499
69
24
38
93
406
265
141
FY16E
180
210
85
4
479
68
23
40
91
388
225
163
FY17E
175
200
90
4
469
65
22
40
87
382
210
172
Source: MOSL, Company
Exhibit 21: CFO to turn positive led by improvement in core
NWC
Cash Flow from Operations (INR m)
Free cash flow (INR m)
Exhibit 22: Cash balance (% of CE) to decline
Cap. Empl. (INR m)
Cash Bal. (% to cap. Empl.)
130%
82%
120%
84%
65%
60%
57%
58%
Cash Bal. (INR m)
FY10
FY11
FY12
FY13
FY14
FY15E FY16E FY17E
Source: MOSL, Company
FY10
FY11
FY12
FY13
FY14
FY15E FY16E FY17E
Source: MOSL, Company
20 March 2015
9

Bharat Electronics
Exhibit 23: BHE: Key orders acquired and executed in FY14
Key orders acquired
Advanced composite communication
Electronic support measures system
Missile warning system
Stabilized optronic pedestal for CRN 91
Passive night vision devices
Modular Combat Management System
Ship borne EQ System
Electronic Voting Machines
Key orders executed
Akash Missile system
Passive night vision devices
Central Acquisition Radar
National Population Register
Electronic support measure system for small ships
Missile warning system
Low level light weight Radar (Bharani)
Low intensity conflict EW system
National Command Control Communication and
Fire Control System
Hull Mounted Sonar
Electronic Voting Machine
Source: MOSL, Company
20 March 2015
10

Bharat Electronics
Maintain Buy; price target of INR3,950 implies 24% upside
We believe that BHE is well positioned to benefit from the rising defence
expenditure, supported by (1) strong manufacturing base (capacity utilization of
~60%) and execution track record, (2) relationships with defence and government
agencies, (3) strategic collaboration with foreign technology partners for new
product development, and (4) in-house R&D capabilities (R&D spend at 7.6% of
revenues). We expect BHE to report EPS of INR154 in FY15 (up 32%), INR180 in FY16
(up 17%), and INR198 in FY17 (up 10%). We maintain
Buy;
our target price is
INR3,950 (20x FY17E EPS); target PER of 20x is near to peak historical valuations to
factor the improved pace of decision-making in defence and higher FII limit.
Key risks:
Delayed decision making for defence procurements and increased
competition from the private sector.
Exhibit 24: Net profit growth of 19% CAGR over FY14-17E
Net Profit (INR m)
% YoY growth
33%
12%
-1%
-9%
17%
7%
4%
10%
24
18
12
6
0
Exhibit 25: P/E band
P/E (x)
5 Yrs Avg(x)
13.0
13.0
10.4
15 Yrs Avg(x)
10 Yrs Avg(x)
19.9
Exhibit 26: Return Ratios to improve
RoE (%)
16.6
17.2
14.7
14.1
13.3
11.9
RoCE (%)
15.5
15.9
15.4
Exhibit 27: P/B band
5.0
4.0
3.0
2.1
1.9
2.4
2.0
1.0
0.0
P/B (x)
5 Yrs Avg(x)
15 Yrs Avg(x)
10 Yrs Avg(x)
3.2
13.2
12.9
6.8
6.5
8.4
11.0
11.5
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Source: Company, MOSL
Source: Company, MOSL
20 March 2015
11

Bharat Electronics
Indian Defence: A Pivotal Trip
Please refer our detailed
report “India Defence”
in January 2015
Urgency to expedite procurements and indigenize production
After a decade of neglect, the Indian defence sector now presents interesting
opportunities for the domestic industry, given that ~INR2t+ of contracts are to be
awarded over the next 1.5-2 years. Defence Acquisition Council has over the last
eight months cleared proposals for INR1.4t, and the pace has been impressive.
‘Make in India’
is an important resolve with several large sized projects worth
INR600b earlier reserved for ‘Buy Global’ category have been shifted to ‘Make and
Buy Indian’ category. In addition, Cabinet Committee on Security in February 2015
has cleared naval projects worth INR1.1t for PSU shipyards. Also projects worth
INR400b have been for the first time reserved exclusively for the private sector.
Exhibit 28: Indian Defence: Interesting opportunities
Projects shifted from ‘Buy
Global’ to ‘Buy and Make
Indian’ worth INR600b
Medium transport aircraft (INR150b)
Light utility helicopters (INR400b)
Mine Sweepers (INR80b)
Defence
Acquisition
Council cleared
projects worth
INR1.4t
Cabinet Committee on Security
has cleared naval projects
worth INR1.1t for PSU
Shipyards
Nuclear Submarines (INR600b)
Stealth Frigates (INR500b)
Large projects exclusively for
private sector
Medium transport aircraft (INR150b)
Landing Platform Docks (INR250b)
Source: Company, MOSL
Possible Game-plan: Our Expectations
The
next 1-year plan
is to set in-motion the process to launch ~15-20 acquisition
programs every year under the ‘Buy Indian’ and ‘Buy and Make Indian’ category. The
five Defence Acquisition Council meetings since August 2014 have cleared INR1.4t of
projects. As these projects get awarded, the industry will get a robust pipeline of
orders over the next 1.5-2 years. Government budget on defence entails cash flow
accounting and thus the capital spend of INR946b can entail that projects of ~INR5t+
can be work in progress, given that a typical project takes ~5 years to be executed.
The
medium term plan (~3-4 years)
is to launch 8-10 ‘Make’ Category projects.
These are the projects where the development will be carried out in India by
consortiums that are technically pre-qualified, with government financing 80% of
the development cost and production orders to be awarded in the ratio of 70:30
(between L1/L2 bidders). Since the introduction in 2006, there has been no ‘Make’
category projects awarded till date. Three large projects are in advanced stages: i)
Tactical Communication System: INR100b (BHE / L&T-Tata Power-HCL Technologies
are the two consortiums) ii) Battlefield Management System: INR400-500b (BHE –
Rolta and Tata Power – L&T have been shortlisted in February 2015) and iii) Future
Infantry Combat Vehicle: INR500b (Tata, Mahindra, L&T, etc).
Next 1-
year plan
Medium
term plan
(~3-4 years)
20 March 2015
12

Bharat Electronics
Defence Acquisition Council
has over the last eight
months cleared proposals
for INR1.4t, and the pace
has been impressive
Exhibit 29: Defence Acquisition Council has cleared proposals for INR1.4t in last eight
months
Date
Jul-14
INR B
150
90
24
70
48
74
18
18
530
32
19
20
158
72
44
Description
56 Avro Aircrafts, of which 16 would be supplied in fly away condition by Airbus
Defence & Space and 40 would be assembled in India as part of technology transfer
5 Fleet support ships
5 Patrol Vessels / 5 Fast Patrol Vessels
32 Advanced Light Helicopters, Dhruv, from HAL for Navy and Coast Guard
Overhaul of four Russian-origin, Kilo-class, and two German-origin HDW submarines
118 Arjun Mark II tanks; 40 self-propelled 130mm artillery guns for Arjun Tanks
Integrated Anti-Submarine Warfare Suites for 11 warships
16 naval multi-role helicopters (Permitting commercial bids to be opened)
Project 75i to build 6 AIP submarines in India
8356 nos Israeli anti-tank guided missiles and 321 Spike family launcher systems
12 upgraded Dornier surveillance aircraft from HAL
Midget Submarines
814 mounted 152mm/52 calibre gun systems
Revise payment terms in ongoing Integrated Air Command and Control System
4 helicopters for survey vessels and upgrading the nation’s electronic warfare system
Source: MOSL, Company
Aug-14
Oct-14
Nov-14
Dec-14
Several initiatives to expedite defence procurements and capacity building
The new Government has set a scorching pace of reforms to accelerate defence
procurements, and importantly focus on ‘capacity building’ in the country. There has
been a perceptible change in the attitude towards streamlining procedures and
processes.
n
FDI limit in defence has been raised to 49% from 26%. The earlier stipulation of
three year lock-in has also been done away with.
n
Streamlining procedures and processes with Defence Industrial Licensing policy
being simplified etc. Also, list of defence products for the purposes of industrial
licensing has been considerably pruned. Along with some dual use items, most
of the components, parts, raw materials, castings, forgings, production
machinery, testing equipments, etc have been taken out of the purview of
industrial licensing.
n
For the first time, large projects like manufacture of medium transport aircraft
(INR150b), Landing Platform Docks (INR250b), etc are being reserved only for
manufacturing by private players and the attempt is to encourage capacity
building.
n
The policy on blacklisting and debarring of vendors is being rationalized to
ensure that Indian interests remain well protected.
n
Defence Export policy has also been streamlined and there are attempts to
encourage exports.
n
Offset is also likely to open up sizeable opportunities, and the policy overhaul is
long overdue. Cumulatively during 2006-2014, ~INR280b of offsets have been
signed, of which just ~30% have been executed. Going forward, industry
estimates that the likely offset from deals in the pipeline, stands at USD10b.
20 March 2015
13

Bharat Electronics
Defence Budget (FY16): Disappointing; but still project award is a long
drawn process, with actual awards expected in FY17
One area where FY16 defence budget has disappointed is the allocation towards
capital acquisition at just INR946b, which is unchanged vs the FY15 Budget Estimate
and is up 15% vs FY15 Revised Estimate. Also, importantly, the share of committed
liabilities (in terms of contracts already awarded) stands at 93%, leaving just INR54b
towards new schemes in FY15. This is unlikely to generate the required money to
sign any major new contracts.
Actual awards is still a long
drawn process
While the stagnant capital budget is a disappointment, still we believe that defence
procurement is a long drawn affair and entails stringent processes involving
Technical Evaluation / Field Trials, Commercial Negotiations, Contract Signing, etc.
Thus, while the news flow in terms of progress amongst the various stages will be
encouraging in the interim period, the actual awards are unlikely before mid FY17.
Exhibit 30: Trend in
Expenditure (INR b)
Defence
Revenue
and
Capital
Exhibit 31: Defence Capital Spending Composition (INR B)
Army
Navy
Air Force
R&D
Others
FY13 (A) FY14 (A) FY15 (BE) FY15 (RE) FY16 (BE)
147.5
144.2
254.7
219.1
266.8
177.6
203.6
238.3
185.1
250.0
323.9
381.9
333.1
333.2
331.1
46.4
52.4
93.0
71.5
77.9
9.5
9.2
26.8
10.9
20.1
Source: MOSL, Company
Source: MOSL, Company
20 March 2015
14

Bharat Electronics
Exhibit 32: Actual awards is still a long drawn process (11 stage process)
Source: DPP 2013, MOSL
The Defence Procurement Policy 2013 states that the procurement process largely
involves 11 stages. While the early stage of Issue of draft RfP to receipt of responses
can be completed in the first 20 weeks, the later stages involving Technical
Evaluation/Field trials post submission of Responses and Commercial Negotiations/
Contract signing takes ~50-60 weeks each.
Exhibit 33: Defence Procurement Procedure for ‘Buy’, ‘Buy and Make with ToT’ and ‘Buy and Make Indian’ (weeks)
Drafting to receipt of response stage
n
Acceptance of Necessity
n
Initiation of draft Request for Proposal
Technical Evaluation/field trials stage
n
n
n
n
n
n
n
for collegiate vetting at Ministry of
Defence
n
Issue of Request for proposal
n
Pre-bid Meeting
n
Dispatch of pre-bid reply
n
Receipt of Responses
Completion of Technical Evaluation
Committee (TEC) report
Acceptance of TEC report
Completion of Technical offset
evaluation committee report
Acceptance of Technical offset
evaluation committee report
Completion of Field Evaluation (Trials)
Completion of staff evaluation
Acceptance of trials/ staff evaluation
report
Commercial Negotiations/contract signing
stage
n
Acceptance of Technical Oversight
Committee report
n
Finalization of Contract Negotiation
Committee report and offset contract
n
Obtaining of Competent Financial
Authority – Ministry of Defence /
Ministry of Finance / Cabinet
Committee on Security approval
n
Signing of main contract and signing
of offset contract
Timeline: (86-137 weeks)
Timeline: (0-20 weeks)
Timeline: (21-85 weeks)
20 March 2015
15

Bharat Electronics
Exhibit 34: Indian
Defence
Spend (INR b)
Mar-06
Defence
Revenue
Capital
Total Expenditure
Capital Expenditure
Army
Navy
Air Force
R&D
Others
Total
% Contribution
Army
Navy
Air Force
R&D
Others
Total
482
323
805
Mar-07
517
338
855
Mar-08
542
375
917
Mar-09
733
409
1142
Mar-10
907
511
1418
Mar-11
921
621
1541
Mar-12
1030
679
1709
Mar-13
1113
705
1818
Mar-14
1244
791
2035
Mar-15
1404
820
2224
Mar-16
1521
946
2467
97
85
121
25
3
331
98
90
129
24
3
345
116
106
167
27
4
419
113
93
170
31
4
410
148
133
184
42
4
511
158
171
234
50
8
621
149
192
283
46
8
679
148
178
324
46
9
705
144
204
382
52
9
791
219
185
333
71
11
820
267
250
331
78
20
946
29
26
37
8
1
100
29
26
37
7
1
100
28
25
40
6
1
100
28
23
41
8
1
100
29
26
36
8
1
100
25
28
38
8
1
100
22
28
42
7
1
100
21
25
46
7
1
100
18
27
28
26
25
26
48
35
35
7
10
8
1
3
2
100
100
100
Source: Budget Documents
20 March 2015
16

Bharat Electronics
Exhibit 35: BHE - Operating metrics
INR M
Order book
Y-o-Y growth
Order inflow
Y-o-Y growth
Execution
Y-o-Y growth
Book to bill ratio (x)
Revenues
Defence
Non Defence
Revenues
Indigeniously developed
In association with DRDO, etc
Total Indigenous
ToT from Foreign OEM's
Revenues
Domestic
Exports
Exports, % of Total
Cost structure (% of Revenues)
Raw material cost
Employee Cost
Other Expenses
Provisions/write off
R&D Expenses (INR M)
R&D Expenses % to Sales
Net cash/( Debt) (INR M)
Core NWC (Days)
Customer Advances
Reported NWC (Days)
FY10
113,500
9.3%
61,444
14.1%
51,804
13.0%
2.2
51,804
44,330
8,798
FY11
236,000
107.9%
177,217
188.4%
54,717
5.6%
4.3
54,717
44,696
11,174
FY12
257,480
9.1%
77,897
-56.0%
56,500
3.3%
4.6
56,500
42,104
15,573
FY13
249,490
-3.1%
52,425
-32.7%
59,905
6.0%
4.2
59,905
51,882
9,156
FY14
234,520
-6.0%
42,300
-19.3%
61,223
2.2%
3.8
61,223
52,087
10,668
FY15E
210,922
-10.1%
48,645
15.0%
72,243
18.0%
2.9
72,243
60,684
11,559
FY16E
217,571
3.2%
87,561
80.0%
80,912
12.0%
2.7
80,912
67,157
13,755
FY17E
220,507
1.3%
91,939
5.0%
89,003
10.0%
2.5
89,003
72,983
16,021
57.0%
18.0%
75.0%
25.0%
57.0%
21.0%
78.0%
22.0%
54.0%
27.0%
81.0%
19.0%
NA
NA
78.0%
22.0%
41.0%
44.0%
85.0%
15.0%
51,131
1,067
2.1%
53,680
1,617
3.0%
55,157
1,879
3.3%
58,340
1,782
3.0%
59,232
2,510
4.1%
68,980
3,263
4.5%
76,670
4,242
5.2%
83,489
5,514
6.2%
56.4
19.0
4.8
2.0
3159
5.9
35,777
283
241
43
56.3
18.6
5.0
2.4
3882
6.9
65,192
311
421
-110
62.1
18.7
5.7
2.9
4682
8.1
67,725
365
454
-89
62.4
18.2
6.0
2.9
5099
8.4
53,025
396
353
43
57.9
16.4
6.3
5.4
4670
7.4
45,644
418
307
111
56.5
15.9
6.3
4.3
57.0
14.8
6.3
3.5
57.7
14.6
6.3
3.3
47,589
406
265
141
52,042
59,687
388
382
225
210
163
172
Source: Company, MOSL
20 March 2015
17

Bharat Electronics
Appendix
Exhibit 36: Battlefield Management System
Source: Industry
Exhibit 37: Tactical Communication System
Source: Industry
20 March 2015
18

Bharat Electronics
Exhibit 38: BHE: Customer profile
Segments
Defence Communication
Naval Systems, Electro Optics, Electronic
Warfare, Avionics, Tank Electronics,
Weapon Systems, Command and Control
Systems
Radars & Sonars
Telecommunication
Broadcasting Equipments and Studio
Systems
Electronic Voting Machine
Solar Products & Systems
Turnkey Systems, E-Governance
Networks
Components
Customers
Indian Defence Services, Para-military forces
Indian Defence Services, Para-military forces
Indian Defence Services, Civil Aviation, Meteorological
Department, Space Department.
Department of Telecommunication, Para-military forces,
Railways, DRDO
All India Radio, Doordarshan, (National Radio & TV
Broadcasters), ISRO
Election Commission of India.
Police, Individuals, Private and Government organizations.
Police, State governments, Public sector undertakings,
ISRO
All India Radio and Doordarshan the National Radio & TV
Broadcasters, Instrumentation Industry, Switching
Industry, Entertainment Industry, Telephone Industry,
Individuals
Source: MOSL, Company
Exhibit 39: BHE’s Key Product portfolio
Defence Products
Non Defence Products
Services
§
§
§
§
§
§
§
§
§
§
§
§
Army Communication Products &
Systems
Land-based Radars
Naval Systems
Electronic Warfare Systems
Avionics
Electro Optics
Tank & Armoured Fighting Vehicle
Weapon Systems
C4I Systems
Shelters & Masts
Simulators
Batteries
§
§
§
§
§
§
E-governance
Systems
Homeland
Civilian Radars
Solar products
Electronic
Telecom,
§
§
§
§
§
§
§
§
PCB assembly (SMT, Through Hole, BGA) and testing
Precision Machining and Fabrication
Opto electronics components and assemblies
Microwave Integrated Circuit Assemblies
Super Components Modules
Cable assemblies and wiring harnesses
Design and manufacturing of professional grade
Antennae manufacturing
Source: MOSL, Company
20 March 2015
19

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 (%)
Reported PAT
EO Income (Net of Expenses)
Adjusted 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
Application of Funds
E: MOSt Estimates
2010
53,128
14.3
32,491
10,096
1,051
9,490
17.9
1,159
5
2,440
10,766
3,242
30.1
7,524
-315
7,209
-3.3
2011
55,870
5.2
34,248
10,419
1,309
9,895
17.7
1,220
4
2,740
11,411
2,997
26.3
8,414
201
8,615
19.5
2012
57,676
3.2
39,104
10,812
1,614
6,146
10.7
1,208
6
5,855
10,787
2,450
22.7
8,338
-39
8,299
-3.7
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
2015E
73,852
17.7
46,342
11,744
3,139
12,627
17.1
1,501
3
4,500
15,623
3,281
21.0
12,343
0
12,343
32.5
2016E
82,602
11.8
52,245
12,235
2,891
15,230
18.4
1,605
0
4,500
18,125
3,716
20.5
14,409
0
14,409
16.7
(INR Million)
2017E
90,777
9.9
58,052
13,284
2,950
16,491
18.2
1,712
0
5,000
19,778
3,956
20.0
15,823
0
15,823
9.8
(INR Million)
2017E
800
102,128
102,928
0
-3,000
99,928
25,867
20,576
5,291
2,000
120
176,330
43,523
49,741
59,687
22,383
995
83,814
73,865
9,948
92,517
99,928
2010
800
42,656
43,456
7
-1,567
41,896
17,022
12,122
4,900
314
120
86,288
24,487
21,684
35,784
4,333
0
49,725
44,310
5,415
36,563
41,897
2011
800
49,226
50,026
1
-1,806
48,220
17,890
13,053
4,837
577
120
124,277
24,603
28,973
65,194
5,284
224
81,589
75,853
5,736
42,687
48,221
2012
800
55,570
56,370
0
-2,282
54,088
19,016
13,914
5,102
1,136
120
139,941
27,918
26,869
67,725
16,813
616
92,210
86,323
5,887
47,731
54,088
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
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
67,303
2015E
800
78,958
79,758
0
-3,000
76,758
23,467
17,258
6,209
2,000
120
148,553
38,443
45,525
47,589
16,187
809
80,124
72,436
7,689
68,429
76,758
2016E
800
90,001
90,801
0
-3,000
87,801
24,667
18,863
5,803
2,000
120
160,443
40,735
47,524
52,042
19,236
905
80,565
71,513
9,052
79,878
87,801
20 March 2015
20

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
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
2010
94.1
-8.6
104.6
543.2
19.2
21
2011
105.2
11.8
122.9
625.3
21.6
20
2012
104.2
-0.9
118.8
704.6
20.8
20
2013
112.0
7.5
127.6
790.4
22.3
20
2014
116.4
3.9
134.2
878.7
23.3
20
2015E
154.3
32.6
173.0
997.0
30.9
20
2016E
180.1
16.7
200.2
1,135.0
36.0
20
2017E
197.8
9.8
219.2
1,286.6
39.6
20
24.3
20.9
14.7
2.7
4.0
0.9
15.6
13.7
7.0
1.3
2.7
1.3
14.7
12.8
8.8
1.0
2.2
1.4
10.3
9.0
6.1
0.6
1.5
1.9
9.8
8.5
5.2
0.8
1.3
2.0
22.0
19.7
17.8
3.1
3.4
0.9
18.9
17.0
14.4
2.7
3.0
1.1
17.2
15.5
12.9
2.4
2.6
1.2
16.6
13.2
95.9
17.2
12.9
-37.7
14.7
6.8
-27.7
14.1
6.5
55.5
13.3
8.4
27.6
15.5
11.0
30.3
15.9
11.9
30.4
15.4
11.5
29.5
149
168
3.0
189
161
3.1
170
177
3.0
199
196
2.9
241
196
2.7
225
190
3.1
210
180
3.3
200
175
3.4
(INR Million)
2017E
19,778
1,712
0
3,956
-4,993
12,542
0
12,542
-1,200
-1,200
0
0
0
3,696
-3,696
7,645
52,042
59,687
2010
10,766
1,159
5
3,242
4,157
12,846
-315
12,531
-1,232
-1,232
-131
-5
5
1,793
-1,935
9,365
26,419
35,784
2011
11,411
1,220
4
2,997
23,285
32,924
201
33,124
-1,441
-1,441
-274
-6
4
2,010
-2,295
29,389
35,784
65,173
2012
10,787
1,208
6
2,450
-2,534
7,018
-39
6,979
-2,010
-2,010
-496
-1
6
1,934
-2,437
2,531
65,194
67,725
2013
11,210
1,307
8
2,248
-19,994
-9,717
-64
-9,780
-2,439
-2,439
-390
0
8
2,083
-2,481
-14,700
67,725
53,025
2014
11,741
1,421
34
2,431
-13,062
-2,298
6
-2,291
-2,530
-2,530
-345
0
34
2,181
-2,560
-7,381
53,025
45,644
2015E
15,623
1,501
3
3,281
-7,779
6,068
0
6,068
-1,231
-1,232
-5
0
3
2,883
-2,891
1,945
45,644
47,589
2016E
18,125
1,605
0
3,716
-6,995
9,019
0
9,019
-1,200
-1,200
0
0
0
3,366
-3,366
4,453
47,589
52,042
20 March 2015
21

Bharat Electronics
Corporate profile: Bharat Electronics
Company description
Bharat Electronics Limited (BHE) was established at
Bangalore, India, by the Government of India under
the Ministry of Defence in 1954 to meet the
specialized electronic needs of the Indian defence
services. Over the years, it has grown into a multi-
product, multi-technology, multi-unit company
servicing the needs of customers in diverse fields in
India and abroad.
Exhibit 24: Sensex rebased
Exhibit 41: Shareholding pattern (%)
Dec-14
Promoter
DII
FII
Others
75.0
17.8
2.3
4.9
Sep-14
75.0
17.8
1.9
5.4
Dec-13
75.9
15.3
4.5
4.4
Exhibit 42: Top holders
Holder Name
LIC of India
Reliance Capital Trustee Co Ltd A/c Reliance Equity
% Holding
6.0
1.2
Note: FII Includes depository receipts
Exhibit 43: Top management
Name
Sunil Kumar Sharma
Amol Newaskar
Designation
Chairman & Managing Director
Director
Exhibit 44: Directors
Name
Sunil Kumar Sharma
Amol Newaskar
Manmohan Handa
P R Acharya
M L Shanmukh
P C Jain
Name
Ajit T Kalghatgi
S M Acharya*
Vinod Kumar Mehta*
Vikram Srivastava*
C A Krishnan
J Rama Krishna
*Independent
Exhibit 45: Auditors
Name
Badari Madhusudhan& Srinivasan
P S V & Associates
Mittal Gupta & Co
Type
Statutory
Cost Auditor
Branch
Exhibit 46: MOSL forecast v/s consensus
EPS (INR)
FY15
FY16
FY17
MOSL
forecast
154.3
180.1
197.8
Consensus
forecast
125.6
145.7
171.2
Variation (%)
22.9
23.6
15.6
20 March 2015
22

Bharat Electronics
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