Bharat Dynamics - Guided missile systems to drive orderbook and profit growth - ICICI Securities

Bharat Dynamics (BDL) is a leading Defence PSU in India manufacturing guided missile systems. It has a product portfolio consisting of Surface-to-Air Missiles (SAMs), Anti-Tank Guided Missiles (ATGMs), underwater weapons, launchers, counter-measures, and test equipment. BDL also undertakes life-extension as well as refurbishment work on missile systems. Currently, it is the key domestic supplier of SAMs and ATGMs to the Indian Armed Forces. While July, '21 orderbook stands at Rs87bn (2.6x book to bill), management has reiterated the possibility of orderbook expanding to Rs230bn over next two years. Large part of the accretion is expected from Akash 3 rd and 4th squadrons (Indian Army) and 'Astra beyond visual range' (air-to-air missiles). Also, we believe BDL has the potential to benefit from India's focus on defence exports. We initiate coverage on BDL with a BUY rating and DCF-based target price of Rs600/share (implying P/E of 15x FY23E). Key risks include delay in execution, higher LDs accruing because of the same, lower than expected orderbook accretion, and higher material costs.

- Orderbook has potential to reach Rs230bn in next two years. We believe this is the single biggest investment thesis for BDL and can potentially increase the book to bill ratio 5x by FY23E. The biggest component of the orderbook as expected are Akash 3rd and 4th regiment orders for the Indian Army and 'Astra beyond visual range air-to-air missiles' (both these projects combined will lead to accrual of Rs130bn in order inflow in the medium term). The expected execution on these missiles is also 2-3 years, which, we believe, allows for a much more constructive stance on possible medium-term revenues. VSHORAD and Smart anti-airfield weapon orders are expected in FY22E. ATGM orders will also be spread across FY22E and FY23E. Besides, there are many more products jointly developed with DRDO (e.g. Akash NG, MPATGM, Nag and Helina ATGMs), where user trials have been completed (or are on the verge of completion) and orders are expected over the next two years.

- BDL can play leading role in achieving Indian defence export target of Rs350bn by CY25. Akash weapon system has been cleared for exports by the ministry of defence (MoD). Underwater weapon exports to friendly countries continue. Third-gen anti-air guided weapon system, and heavyweight torpedo are among the potentially exportable products. The extent of MoUs with the global players - including Roxel (France) for establishment of propulsion systems, MBDA (France) for domestic production of Mistral and ASRAAM missiles, Thales for Starstreak MANPADS, AlmazAntey (Russia) for spares manufacturing - suggests increasing indigenous production with more and more export opportunities coming BDL's way in the near future. IAI Israel has placed an order with BDL for integration of missiles.

- Progressive capacity creation underway as visibility on missile orderbook is strong. BDL has established production facilities for manufacture of MPATGMs at its Bhanur unit - this will cater to the largest possible orderflow of MPAD/MPAT over next few years (including export orders). BDL is also in the process of setting up two additional manufacturing facilities at Ibrahimpatnam (near Hyderabad) and Amravati in Maharashtra, which will be used to manufacture SAMs and Very Short-Range Air Defence Missiles (VSHORADM), respectively.

Shares of Bharat Dynamics Limited was last trading in BSE at Rs. 375.3 as compared to the previous close of Rs. 387.95. The total number of shares traded during the day was 13747 in over 793 trades.

The stock hit an intraday high of Rs. 392.35 and intraday low of 373.4. The net turnover during the day was Rs. 5245818.

Source : Equity Bulls

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