Bharat Electronics' Q1FY19 results (Outperformer) - Strong operating performance; order intake key

Q1FY19 result highlights

• PAT at Rs1.8bn (+43.4% yoy): was sharply ahead of estimates on strong operational performance, partly offset by lower other income (-88% yoy; lower cash on Rs3.7bn buyback as also increase in capex and working capital).
• Robust revenues (+21.9% yoy to Rs21.9bn): led by strong pick up in execution of major orders Integrated Air command & control system (IACCS), Electronic Warfare Systems (EWS), Weapon Locating Radar (WLR), etc. Additionally, execution of Electronics Voting Machines (EVM)/Voter Verifiable Paper Audit Trail (VVPAT) orders is picking up and is likely to conclude by Q3FY19 (Rs32bn backlog).
• Lower RM cost, positive operating leverage drives margin: expansion of 530bps to 14.8%. Moreover, margins were also supported by execution of key defence projects during the quarter. Hence, EBITDA grew 90% yoy to Rs3.1bn.
• Order intake steady: at Rs35.8bn (+1.4% yoy) led by orders from AMC for Rohini radar, upgradation of Shikari/Lynx fire control systems, weapon repair facility, among others. Intake pipeline remains healthy with likely order wins from projects such as LRSAM, Akash, etc. Order backlog +17.5% yoy to Rs416.5bn (3.5x FY19E rev).

Key positives: Strong pick up in execution, robust margins

Key negatives: Delays in major orders, sharp fall in other income

Impact on financials: FY19/FY20 EPS cut by 7.8%/4.5% to Rs5.9 / 7.1

Valuations & view

The stock has corrected 30%+ over the past 6 months on order win slippages and likely margin drop on strong EVM order execution. However, we believe concerns are factored in and the order backlog would drive a sustained 15% revenue growth over FY18-20E. We believe, the positive operating leverage, muted employee costs and uptick in defence project execution is likely to offset the impact of EVM on margins (100bps drop in FY19 OPM) and thereby drive 14% EBITDA CAGR over FY18-20E (earnings to be impacted on lower other income). We believe valuations at 16.5x FY20E earnings are attractive considering pick up in order inflows as BEL is well-positioned to capture the growing defence spend led by its strong manufacturing capabilities and R&D focus. Maintain Outperformer.