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MOSL: BHARAT ELECTRONICS (Buy)-Expect orders to spurt in FY19; Management targets to double sales

Bharat Electronics: Expect orders to spurt in FY19; Management targets to double sales to INR200b by FY23

(BHE IN, Mkt Cap USD5.6b, CMP INR145, TP INR196, 33% Upside, Buy)

 

We met BHE’s senior management team. Our key takeaways:

 Akash and LR SAM orders deferred to 1HFY19

BHE received orders of INR100b (42% decline) in FY18, lower than our estimate of INR160b primarily due to the Akash (7th Squadron) order slipping into 1QFY19. Its order book at the end of the year was flat YoY at INR400b. Price negotiations for the Akash order have been completed and BHE should receive the final order shortly. The LR SAM order (INR60b-70b) is also likely to be placed by 1HFY19. Other large orders in the pipeline include EW Samyukta (INR10b), Commander Thermal Imagers, QR SAM and Akash (Army; two regiments). We estimate orders of INR180b-190b in FY19.

 Targeting 15% sales CAGR; EBITDA margin to sustain at 18%

Sales should grow at a CAGR of 15%, with BHE targeting to double sales to INR200b in five years. EBITDA margin is likely to sustain at 18%, despite the execution of low margin orders like electronic voting machines and LR SAM, as these will be offset by higher margin orders like Akash missile systems. We note that 1HFY19 will have a higher share of EVM supplies; so, margin during 1H19 could be low, but this will be made up for in 2HFY19. Other income could decline, given the government’s desire to receive higher dividends from cash-rich state-owned entities. Tax rate (FY17: 24%) is likely to rise to 28% in FY19 and 31% in FY20.