Bharat Electronics - Risks to guidance - ICICI Securities

Bharat Electronics (BEL) management highlighted potential FY21E topline and order inflow at >Rs140bn and Rs150bn respectively. Order inflow expectations comprise: i) Rs100bn of probable Akash missile (Army) order to Bharat Dynamics (BDL) will have ~60% of order value accruing to BEL; ii) similarly, ~Rs25bn of Astra missile order to BDL will ensure that 30-40% accrues to BEL; iii) ~Rs370bn of LCA Tejas order to Hindustan Aeronautics (HAL) can see ~Rs35bn of order value coming to BEL; and iv) electronic warfare orders. Q1FY21 witnessed ~Rs34bn of order inflow, of which ~Rs12bn was on account of ventilators and Rs7bn was on account of Naval orders. Q1FY21 execution was impacted by 45-day shutdown leading to a lower than expected print. Receivables touched ~Rs71bn post Q1FY21 (from Rs64bn QoQ); high receivables can eventually cause execution to slow down. Maintain REDUCE.

- Q1FY21 missed expectations as 45-day extended lockdown hampered execution. Against a possible topline of Rs22bn, BEL could muster Rs16.4bn. It could execute Rs4bn worth of orders for ventilators and typically, like all other ex-defence orders, the product margins did turn out to be better than initially feared. Thus gross margins increased 100bos YoY to 50.7%. However, a 21% YoY decline in revenues led to 58% YoY decline in EBITDA and 74% YoY decline in PAT. Management expects execution to pick up in Q2FY21; Indian defence OEMs remain amongst the few globally where execution has been impacted by the Covid-19 lockdown.

- FY21E guidance on execution and order inflow still strong. The FY21E order pipeline is quite visible with ~Rs 125bn of missile orders to BDL and Rs370bn of LCA Mk1A orders to HAL. These two orders alone can accrue Rs100bn-110bn of inflow for BEL. Add to that the Rs34bn worth of order inflow already achieved in Q1FY21 and the guidance appears quite reasonable. Execution size of Rs140bn and above is the tricky one to repose faith on - which will comprise of Rs12bn of ventilators (Rs8bn of the remaining to be executed in Q2FY21), Akash squadrons for Air Force (received last year, LRSAM, smart city orders (Rs 10bn) etc.

- Cashflow remains an area of concern in FY21E and may impact execution. Management reiterated that order inflow is not a concern, yet cashflow is. Q1FY21 witnessed receivables increasing to Rs71bn from Rs64bn QoQ, hence cash and cash balance decreasing from Rs17bn to ~Rs10bn QoQ. With expected execution of Rs20bn-25bn in Q2FY21, there is a real risk of BEL turning to a net debt company by Q3FY21. Undue increase of receivables may force the company to slow down execution - a real risk we have currently factored in our numbers. Also, continued reliance on imports (Rafale, P8I, Mig 29K, Su-30 - and the list keeps growing - for FY21E) can make the cashflow situation more difficult for defence PSUs by H2FY21-end.

Shares of BHARAT ELECTRONICS LTD. was last trading in BSE at Rs.97.15 as compared to the previous close of Rs. 99.3. The total number of shares traded during the day was 832571 in over 4153 trades.

The stock hit an intraday high of Rs. 99.25 and intraday low of 95.45. The net turnover during the day was Rs. 81039866.

Source : Equity Bulls

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