Buy Bharat Electronics - CMP: Rs.1241, TP: Rs.1433 - Prabhudas Lilladher

Favoured player amongst peers: Bharat Electronics (BEL) is a pure play on growing expenditure by the Indian government on defence. It is a market leader, with ~60% market share in defence electronics in India. The company has an order book of Rs235bn (executable over four years). Though private competition has opened up in the sector, BEL believes that it is a threat only in the long term (4-5 years).

Margins Outlook: Margins in FY12 came down to 9%, mainly on account of delay in booking sales, delay in supply by vendors and delay in approval by customers. Also, higher proportion of non-defence sale is at 27% due to non-regular orders like tablet PC, national population register and socioeconomic caste census. Going forward, BEL believes that the margins can be maintained in the band of 12-14%.

Healthy order book provides strong visibility-Greater opportunity ahead: Current order book stands at ~Rs235bn which is to be executed over the next four years providing strong visibility. The company maintains that the order flow in the current year will be ~Rs100bn. However, channel checks suggest the order flow could be in the range of Rs60bn for FY13. The long term potential, on the other hand, is huge with cumulative market size of Rs3,200bn by 2020 (mainly back-ended in FY18/19/20). We expect the order flow to grow at a CAGR of 10% over FY12-14E.

Outlook & Valuation: The stock is trading at 9.5x FY14E earnings. We expect the stock to deliver 11% CAGR in earnings and 10% CAGR in order flow over FY12-15E. BEL remains the best play on increasing defence spend. We assign 'BUY', with a target price of Rs1,433.

Source : Equity Bulls

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