Bharat Electronics: Marching from a ‘Miss’ to ‘Beat’

Recommendation: Buy

Target Price: Rs 139

Probable receipt of a couple of large orders on 31^st March 2023 (Akash Prime or EWS for naval corvettes) may further drive a 20-25% beat in inflows. More than the timing of these orders, strong order flows with high localization content underlines GoI’s thrust on domestic defence production and bodes well for profitable growth of BHE over FY23-25. Relative resilience in execution of defence projects add certainty to the 20% EPS CAGR in FY23-25. Further, inexpensive valuations at 19xFY24 and 15x FY25 EPS makes BHE an attractive bet.

In a secure position for FY23

While execution / revenues for BHE were marching ahead of guidance for 9MFY23 (24% YoY), uncertainty on inflows is now behind with robust pace of order finalization by MoD in the last few days of March 2023 (Arudhara, Himshakti, Akashteer). While the timing of Akash Prime may swing inflows further, order book of Rs600-620 billion will be strong enough to ensure 15-18% revenue CAGR and ~20% EPS CAGR in FY23-25. A beat in FY23 revenues (Rs175-180 billion guided) and inflows will not be surprising now.

Better comfort on FY24

Execution of short cycle orders like EVM/VVPAT, higher indigenization content in large projects like LRSAM and Akash (IAF) in FY24 and strong OB at start of the year will ensure 15%+ YoY revenues with healthy OPM in FY24 for BHE. With optimism on QRSAM (not included in FY24), inflows should sustain the momentum.

Downside capped, time to Buy

Concerns on inflows and growth visibility are overdone in BHE. Valuations at 19xFY24 estimated EPS indicate limited scope for incremental downside; the stock is a good bet versus peers given inexpensive valuations, greater certainty on FY24 performance, healthy NWC, strong balance-sheet and returns profile, believe analysts at IIFL Securities.