MOSL: BHARAT ELECTRONICS | Annual Report (Buy)- Capex of INR25b to capture future growth opportunities-Plans to expand through diversification
​BHARAT ELECTRONICS | Annual Report: Capex of INR25b to capture future growth opportunities; Plans to expand through diversification; R&D remains key focus area
(BHE IN, Mkt Cap USD6.6b, CMP INR188, TP INR215, 15% Upside, Buy)
Capex plans of INR25b over next 3-4 years
BHE plans to spend INR25b over the next 3-4 years (INR5b-6b annually) on modernization of its facilities and capacity expansion. Key projects include: (a) setting up a missile/defense systems integration complex (INR5b) spread over 900 acres in Andhra Pradesh, (b) electro-optical device manufacturing facility (INR2.5b) in Andhra Pradesh, and (c) electronic warfare test range. BHE is also upgrading its image intensifier technology-based tubes fabrication facility (INR2b).
Provision reversals aid margin expansion in FY17
BHE’s other operating income for FY17 grew 104% to INR3.1b, led by withdrawal of provisions on (a) onerous contract, and (b) doubtful debts and liquidated damages. Provisions withdrawn in both the categories stood at INR1.7b as against INR0.02b in FY16. Provision withdrawal led to gross margin expansion of 100bp to 48.8% and operating margin improvement of 150bp to 20.5%.
NWC cycle elongates as customer advances declines
Net working capital (NWC) cycle for FY17 elongated to 91 days from 28 days in FY16. Deterioration in NWC was mainly on account of decline in customer advances from INR63.1b in FY16 to INR60.1b. Net core working capital cycle was stable in FY17 at 349 days (342 days in FY16). Inventory as well as receivables days were stable in FY17 at 208 days and 185 days, respectively.
Bharat Electronics Limited is engaged in design, manufacture and supply of electronics products/systems for the defense requirements, as well as for nondefense markets. The Company's principal products/services include weapon systems, radar and fire control systems, and communication. Its defense products include defense communication; radars; naval systems; command, control, communications, computers, and intelligence systems; weapon systems; telecom and broadcast systems; electronic warfare; electro optics, and solar photovoltaic systems. Its nondefense products include turnkey system solutions; civilian radars; e-governance systems, and homeland security. Its other range of products include electronic voting machines, communication equipment, radar warning receiver and casings. It offers electronic manufacturing services in areas of printed circuit board assembly and testing; precision machining and fabrication; opto electronics components and assemblies, and offsets, among others.
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