MOSL: BHARAT ELECTRONICS (Buy)-Highlighting key pillars of growth-Four key drivers crucial for sales and earnings growth

​BHARAT ELECTRONICS: Highlighting key pillars of growth; Four key drivers crucial for sales and earnings growth

(BHE IN, Mkt Cap USD6.7b, CMP INR179, TP INR210, 19% Upside, Buy)

• Post a sedate 5% CAGR in sales growth over FY11-15, growth accelerated to 15% over FY16-17. In our view, there are four key pillars crucial to BHE’s sales and earnings growth over the next few years. We highlight these in this update.
  
• Success in large systems programs: BHE diversified into missile systems when it collaborated with the DRDO to develop the indigenous Akash Missile System for the Air Force, starting 2009. Thereafter, it has won repeat orders from the Air Force/Navy, the latest being orders for the LR SAM-Barack 8 Missile for the Navy. It has also partnered with the DRDO on the QR SAM Missile System, for which orders are expected from FY19, apart from the order for the Akash (seven squadrons) for the Air Force. BHE is also in the fray for the Tactical Communication System (TCS) and Battle Management System (BMS).
  
• Expansion of customer base with strategic partnership (SP) model and addition of private sector players to existing kitty of customers: With the successful implementation of the SP model, we expect BHE’s customer base to be more diversified – until now, it was primarily a sub-vendor to DPSUs that were making large platforms.
  
• Increase in exports from 5% of sales in FY17 to 10%: Exports, primarily to neighboring countries, is a key focus area and could double from the existing 5% of sales. These would typically occur under G2G contracts and the SE Asian countries targeted are Vietnam, Sri Lanka, Indonesia, Nepal and Myanmar.