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MOSL: BHARAT ELECTRONICS (Buy)-Confident of bucking margin pressure-Akash missile system order improves revenue visibility further

BHARAT ELECTRONICS: Confident of bucking margin pressure; Akash missile system order improves revenue visibility further 

(BHE IN, Mkt Cap USD3.7b, CMP INR108, TP INR127, 18% Upside, Buy)

 

We attended Bharat Electronics’ (BHE) analyst meet in Bangalore. Key takeaways:

 Confident of delivering 12-15% revenue growth over next few years: Management reiterated its guidance of revenue growth of 12-15% for FY20 and maintaining this run-rate over the next 4-5 years. Adjusted for EVM/VVPAT revenue of INR26b in FY19, management's guidance implies revenue growth of 43-47% in FY20 (1QFY20: +27% YoY).

• Order book strength comforting: BEL recently secured the much-awaited Akash missile system order worth INR53.6b. For FY20, it has already garnered order inflows of INR90b v/s its full-year guidance of INR150b. Key orders in pipeline include coastal surveillance (INR25b), naval project (INR25-30b), smart city and homeland security (INR10b). As of date, the order book stands robust at INR576b with an OB/rev ratio of ~4.8x, providing strong revenue growth visibility for the next few years. Two key big-ticket orders are LRSAM (INR150b) and Akash (INR53.6b). While LRSAM order is scheduled for completion by FY26, the Akash order will likely be completed in three years starting FY21.
• Well placed to tackle margin pressure under new policy: A key concern on BEL's stock performance has been the extent of margin erosion under the new pricing policy for nomination projects finalized by the Ministry of Defence (7.5% PBT margin v/s 12.5% earlier). We note that the Akash order is the only one to be impacted by the new pricing policy, while the remaining order book of ~INR520b stands insulated. However, management expects a limited 50-200bp impact on margins for nomination orders starting FY22 from the new policy change. This is because the proportion of nomination-based orders is on a decline. The company aims to improve its efficiency level which may help it clock higher margin in nomination-based orders. Management appeared confident of clocking substantially higher margin in the Akash order than 7.5%, as it has strong control over the entire supply chain. Moreover, BEL aims to mitigate the impact of the new policy by increasing non-defense and services revenues. The margin guidance stands at 20-21% for FY20.