Bharat Electronics - Mgt confident to grow amidst rising concerns; visit note; Buy - Edelweiss

We recently visited BELs Bangalore plant and also interacted with the top management team to gain insights into the recent issues surrounding the company and long term growth potential. Key notes are as follows:

Mgt re-iterates FY13E guidance; Expect margins to sustain 12-13%

Despite weak H1, the management expects to post a turnover of INR63bn, in line with its FY13E sales guidance, implying a 20% yoy growth for H2.It expects activity at MoD to pick up in the coming quarters. Also, OI guidance of INR70 bn for FY13E is maintained (H1OI at INR22bn only), led by major project awards especially during Q4FY13E. The management expects EBIDTA margins to improve substantially from FY14E on the back of better volumes, increased component of indigenised sub-systems in defence projects and expect long term margins to sustain 12-13 % levels.

JVs could significantly contribute to growth visibility

The management expects fresh project awards of INR170bn, largely in the non-competitive segment over FY13E-14E; this is excluding any upside from MRCA(> USD3bn potential for BEL, in avionics, radars), TCS(INR100 bn opportunity) etc, which could add a substantial chunk to BELs OB over the next 2-3 years. BELs JV with Thales (France) for advanced radars is expected to be operational by March, 2014E.

Focus on R&D and Sub-systems to impart competitive edge

BEL has historically incurred 7-8% sales on R&D, which it targets to take to 10 % from FY14E onwards. The increased R&D budget would be towards developing more and more sub-systems which in turn would help lower costs and provide competitive edge.

Outlook and valuations: Positive; maintain 'BUY'

BELs underperformance in last 12M, factors in weak project deliveries and low OI expectations for FY13E. However, with FY14E-FY15E expected to see a strong pick up in both profitability and OI momentum, we expect BEL to outperform over the next 12-15 months. We maintain our BUY/SO rating with a TP of INR1610. The stock trades at a P/E of 11.7x & 9.3x its FY13E & FY14E EPS respectively.

Source : Equity Bulls

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