Bharat Electronics - FY21E revenue guidance at risk - ICICI Securities

Bharat Electronics' (BEL) lower than expected execution in Q3FY21 (1.1% YoY standalone revenue growth) will test FY21E revenue guidance. Higher than expected margin performance (360bps QoQ increase in gross margins) allowed standalone EBITDA to increase 24.1% YoY. Core 9MFY21 EBITDA margins (ex other operating income) also witnessed ~110bps increase YoY. EBITDA margin guidance of 20+/-1%, even without any favourable policy review of cost-plus margins in nominated orders, looks achievable. Strategy to diversify revenue streams away from a constrained domestic defence budget will be key to achieve double-digit revenue growth. Management has earlier guided towards higher capex run rate to achieve the same (10-15% YoY capex growth p.a. from the likely Rs5.5bn in FY21E). We downgrade BEL to REDUCE from Hold post the run-up in share price with a revised target price of Rs121/share (from Rs102).

- 9MFY21 order inflow strong at ~Rs99bn. The FY21 order pipeline is quite visible with ~Rs125bn of missile orders to BDL and Rs380bn of LCA Mk1A orders to HAL. These two orders alone can generate Rs100bn-110bn of revenue for BEL. Add to it the Rs99bn worth of order inflow already achieved in 9MFY21 - and the guidance of Rs140bn-150bn appears quite reasonable. Current orderbook stands at Rs548bn.

- Near-term order opportunities. BEL has already accounted for execution of avionics related to LCA Mk 2 as HAL has received LoI for the same. Key elements of the avionics package for LCA Mk 2 include Fly by Wire Digital Flight Control Computer (DFCC). Future opportunities include Jammer for LCA. Also, LUH and LCH (helicopters) may allow sensors (MAWS and counter-measure dispensers along with HMDS) and weapons to significantly augment BEL's avionics revenue.

- Onus will be on diversification and execution; Q3FY21 disappointed. BEL targets: i) civilian segment (including medical equipments) to increase from 7% of topline to 15% in the next 2-3 years; ii) to increase the current 10% revenue contribution from service sector (including AMCs); iii) capture a pie of the revenue expenditure budget of the Armed Forces via entry into electronic fuses and RF seekers (new complex in Machilipatnam to be commissioned soon); and iv) gain share in the base business, i.e. integration of missile complex (Palasamudram; another separate SBU for QRSAM in Bengaluru), entry into ammunitions, etc. Diversification away from the base business (Indian defence) is key to achieve medium-term visibility on double-digit revenue growth.

- Downgrade to REDUCE from Hold. We value BEL at 15x FY23E earnings (vs 14x FY22E earlier). We downgrade the stock to REDUCE from Hold with a revised target price of Rs121/share. FY21E revenue guidance looks to be at risk given the weaker than expected 9MFY21 execution and can lead to consensus earnings downgrade.

Shares of BHARAT ELECTRONICS LTD. was last trading in BSE at Rs.131.25 as compared to the previous close of Rs. 132.3. The total number of shares traded during the day was 617788 in over 4311 trades.

The stock hit an intraday high of Rs. 134.65 and intraday low of 130. The net turnover during the day was Rs. 81570603.

Source : Equity Bulls

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