MOSL: BHARAT ELECTRONICS (Buy)-Higher material content dents margins; core execution strong
Bharat Electronics: Higher material content dents margins; core execution strong
(BHE IN, Mkt Cap USD3.1b, CMP INR91, TP INR115, 27% Upside, Buy)
Subdued operating performance; order book provides confidence
- Bharat Electronics' (BHE) 3QFY20 earnings were impacted by the weak operating performance. While revenue was in line, the major disappointment was on the EBITDA margin, which came in at 15.6% versus our estimate of 20.3%. Thus, net profit was 30% below our estimate.
- Adjusted for EVM/VVPAT order in the base year, execution was strong at 22%/25% for 3QFY20/9MFY20. EBITDA margin tends to be volatile on a quarterly basis, as it depends on the sales mix between deliverables. Current order book is strong at INR550b, with OB/Rev ratio of 5.0x. We cut our FY20/21/22 EPS estimate by 7%/4%/2%. Maintain Buy with a TP of INR115.
Earnings below expectation owing to margin miss
- Revenue declined 16.4% YoY to INR22.7b (in-line). Excluding EVM/VVPAT execution in the base quarter, revenue growth was strong at 21.7%.
- EBITDA declined 54% YoY to INR3.5b - a 25% miss as the margin of 15.6% was below our estimate of 20.3% due to low margins on projects executed during the period owing to high material content.
- PAT declined 57.6% YoY to INR2.1b (30% miss).
- Key supplies made during the quarter include Smart City Elements, Thermal Imaging Camera, Radar Systems, IACCS and LRSAM.
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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