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MOSL: BHARAT ELECTRONICS (Buy)-Operational performance ahead of estimates

Bharat Electronics: Operational performance ahead of estimates

(BHE IN, Mkt Cap USD6.9b, CMP INR177, TP INR210, 18% Upside, Buy)

 

• 3QFY18 operational results beat expectations: BHE reported revenue of INR25.1b (+23.1 YoY; our estimate: INR23.8b) and operating profit of INR4.5b (-8% YoY; our estimate: INR3.8b). Net profit declined 19% YoY to INR3b.
• Key projects executed in 9MFY18 include integrated air command and control systems, hand-held thermal imager-MK II, weapon locating radar, electronic voting machine - VVPAT ship-borne EW system, and L70 gun upgrade.
• EBITDA margin at 17.7%; decline led by adverse revenue mix: Gross margin declined 590bp YoY to 44%, impacted by adverse product mix. Operating profit declined 8% YoY to INR4.5b. EBITDA margin was 17.7% as against 23.6% in 3QFY17, led by weak revenue mix and higher employee cost (+33% YoY) on account of 7th Pay Commission pay hike implementation. Net profit declined 19% YoY to INR3b, impacted by higher tax rate (30% v/s 26% in 3QFY17) and lower other income (-37% YoY), as BHE used cash reserves for share buyback.
• Order backlog robust, inflow muted during the quarter: Order backlog of INR405b as at end-3QFY18 provides strong revenue visibility of 3.8x its TTM revenue. Order inflow increased 8% YoY to INR11.8b in 3QFY18. In 9MFY18, order inflow for BHE was INR72b (up 16% YoY) against our estimate of INR163b for FY18, entailing required run rate of INR91b in 4QFY18. Any delay in finalization of large orders (Akash phase-2 of INR70b and LRSAM order of INR65b) can impact our order inflow estimate for FY18.