4 September 2015
Update | Sector: Capital Goods
Bharat Electronics
BSE Sensex
25,202
S&P CNX
7,655
CMP: INR3,235
TP: INR3,950 (+22%)
Buy
Orders at inflexion point
Stock Info
Bloomberg
Equity Shares (m)
M.Cap. (INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
AvgVal.INRm/Vol‘000
Free float (%)
Expects 8-10% rev CAGR; next 2-3 year order pipeline at INR200b-250b
BHE IN
80.0
258.8/3.9
4,160/1,970
-11/5/70
721/230
25.0
We attended the analyst meet of BHE. Key takeaways are discussed below.
Management expects 8-10% revenue CAGR, margins at 17-18%
Financial Snapshot (INR Billion)
Y/E Mar
2015 2016E 2017E
Net Sales
EBITDA
NP
EPS (INR)
EPS Gr. (%)
BV/Sh (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
68.4
11.4
11.7
145.8
25.3
987
14.8
18.6
15.8
2.3
76.5
13.7
13.3
13.6
14.9
18.7
19.5
2.9
87.8
15.7
15.0
13.2
14.9
18.8
17.2
2.6
FY16 revenues are expected to increase 8-10% YoY to INR72b-74b—marginally
below our estimate of INR77b and at the top-end of guidance. Margins are
expected at 17-18% (our estimate 18%). Over the next five years, the
management expects revenue CAGR of 8-10%.
The management guidance pegs gross margins at 40-44% of sales and EBITDA
margins in the 17-18% band. Employee costs are expected to be contained at
18-20% of sales despite the expected hike post the implementation of Seventh
Pay Commission recommendations.
Management highlighted that there is faster decision making along with
shorter procurement timelines would also help improve the execution cycle
for BHE.
165.6 187.5
1,114 1,258
Next 2-3 year pipeline at INR200b-250bn; medium-term pipeline at
INR500-600b
Shareholding pattern (%)
As on
Jun-15 Mar-15 Jun-15
Promoter
DII
FII
Others
75.0
15.5
3.9
5.6
75.0
15.4
3.4
6.2
75.0
17.7
2.2
5.1
FII includes depository receipts
Stock Performance (1-year)
4,500
3,750
3,000
2,250
1,500
Bharat Electron
Sensex - Rebased
The management expects intake of INR100b in FY16 (almost double that of
FT15), of which INR23b has materialized September 1, 2015. Orders for the
Integrated Air Command and Control System (INR60b-70b) and Weapon
Location Radar (INR20b) are likely to be placed in the next few quarters. FY17
is also likely to see orders of ~INR100b. The management highlighted that the
two large orders—Battle Management System (BMS) and Tactical Control
System (TCS)—are likely to take at least 3-4 years before being finalized and
are currently at the prototype stage.
The management acknowledged that increased private participation has
lowered the number of orders won on nomination (~90% at the moment);
however, private sector competition in products made by BHE is restricted to
communication systems and night vision devices. Private sector players such as
L&T, Reliance, Adani and Mahindra are targeting orders for ships, aircraft, guns
and submarines; given that BHE is a systems supplier to these segments, there
won’t be any competition with private players.
Maintain Buy; play on faster decision making/accelerated indigenization in
defense
We expect BHE to report EPS of INR166 in FY16 (up 14% YoY), INR188 in FY17
(up 13% Yoy). Maintain Buy; our target price is INR3,950 (21x FY17E EPS). Key
triggers are accelerated decision making toward large defense procurements
and increased indigenization.
Ankur Sharma
(ankur.vsharma@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.