MOSL: BHARAT ELECTRONICS (Buy)-Margin-led operational outperformance-Earnings visibility healthy
BHARAT ELECTRONICS: Margin-led operational outperformance; Earnings visibility healthy with reasonable valuations
(BHE IN, Mkt Cap USD3.5b, CMP INR98, TP INR130, 32% Upside, Buy)
- Operational results above estimates: 1QFY20 revenue remained flat YoY at INR21.0b (5% below our est. of INR22.2b). (It is important to note that 1QFY19 revenue included INR4.5b contribution from EVMs, which drove full-year FY19 revenues) Thus, excluding the EVM revenue contribution, core business revenue increased 27% YoY. 1QFY20 revenue was supported by execution of IACCS, radars, smart city business, upgrade of communication equipment, etc. EBITDA grew 12% YoY to INR3.5b (ahead of our est. of INR3.2b), while reported net profit increased 14% YoY to INR2.0b.
- Margin improvement on better revenue mix: Gross margin during the quarter improved 240bp YoY to 49.7%, supported by execution of indigenous products and absence of low margin EVM orders. EBIDTA margin too improved 180bp to 16.6%. Better revenue mix and higher indigenization levels led to margin improvement. BHE expects EBIDTA margins to moderate to 20-21% for FY20E.
- Order backlog robust at INR517b (+24% YoY). Order backlog stands healthy providing strong revenue visibility of 4.3x its TTM revenue. Order inflow declined 45% YoY to INR19.6b in 1QFY20 given the delay in finalization of large ticket orders on account of the general elections. Key orders booked during the quarter are for communication equipment, AMC for radars, and an export order for communication equipment. BHE expects finalization of the Akash missile, coastal surveillance system and the Samyukta upgrade to conclude in FY20, which should lead to an order inflow of INR209b (v/s INR232b in FY19).
- Valuation and view: Given the current order backlog position, execution timelines and capabilities of the company, we maintain a Buy rating on the stock with TP of INR130 (16x Mar'21E EPS, in line with its 10-year average P/E multiple of 16.8x).
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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