Strong Quarter; Robust Outlook Remains Intact For Bharat Electronics

Rating: BUY | CMP: Rs270 | TP: Rs341

Q2FY25 Result update

Quick Pointers:

*     Order book as on 1st Oct’24 stood at Rs746bn (3.6x TTM sales), while order intake for the quarter was ~Rs23bn.

*     The management re-affirmed the guidance of ~15% revenue growth with 23-25% EBITDA margin and ~Rs250bn order intake for FY25.

We upgrade the rating to ‘Buy’ factoring in the recent sharp correction in stock price with an unchanged TP of Rs341. Bharat Electronics (BEL) reported strong quarterly performance with revenue growth of 14.8% YoY and EBITDA margins expanding by 514bps YoY to 30.3%. Opportunities in defense are expected to sustain for the next 5 years. The company is on track to meet its full-year order intake guidance of Rs250bn, including Rs85bn+ worth of order from programs such as Ashwini Radar, EW suite MI-17, ADFCR-ATULYA and Shakti Phase-4. QRSAM is in advanced stages of finalization and is expected to be awarded in Q1FY26, potentially adding another Rs250bn+ to the order inflow in FY26. Further opportunities are available in Uttam Radars for LCA Mk1A, artillery systems being developed by private players, naval products and Kavach for the Indian Railways. The company has streamlined LRSAM and other big-ticket items, leading to easing up of supply chain disruptions and better execution. Additionally, 85%-88% of the products supplied are indigenized, and further indigenization efforts are expected to drive margin expansion.

We remain positive on long-term growth story of BEL given 1) strong order backlog & order pipeline 2) diversification in newer business verticals like, hydrogen fuel cell, EV batteries etc., 3) focus on export markets (Egypt, Malaysia etc.) and 4) govt’s focus on product indigenization. The stock is currently trading at PE of 43.0x/35.7x on earnings of FY25/26E. We value the stock at a PE of 45x FY26E (same as earlier).

Gross margin expansion and higher other income drove PAT growth: Standalone revenue rose 14.8% YoY to Rs45.8bn (PLe: Rs47.0bn). Gross margin expanded by 449bps YoY to 53.4% (PLe: 45.2%). EBITDA grew 38.2% YoY to Rs13.9bn (PLe: Rs11.0bn). EBITDA margin increased by 514bps YoY to 30.3% (PLe: 23.4%) led by the gross margin expansion and employee cost leverage (down 68bps YoY as a % of sales). PBT grew 35.2% YoY to Rs14.5bn (PLe: Rs11.7bn). PAT rose 34.3% YoY to Rs10.9bn (PLe: Rs8.8bn) driven by the strong operating performance, despite lower other income (-2.2% YoY to Rs1.7bn).

Order book stands strong at ~Rs746bn (3.6x TTM sales): Order intake for the quarter stood at ~Rs23bn, including a major order worth Rs8.5bn from Cochin Shipyard for the supply of indigenous multifunction radar in X band. Other key orders include order from TRDS for manufacturing and supply of transmit/receive modules used in fighter aircrafts, orders for combat management systems, communication equipment, stabilized optronic pedestal, and navigational systems. Non-defense accounts for 11.4% of the total order book.