Equity Research Desk

ALPH A 22 JULY 202 1

Bharat Electronics Ltd. - Defending Share Holders

BEL was established in 1954 in association with CSF, France (now, Thales), to
meet the specialized electronic equipment requirements of the Indian
Defence Services. BEL is an Indian Government-owned aerospace and
defence electronics company with about nine manufacturing units, and
several regional offices in India. The Bangalore and the Ghaziabad units are
BEL's two major units, with the Bangalore unit contributing the largest share
to the total revenue and profits. The GoI remains BEL's largest shareholder
with the current shareholding of 51.14%. BEL was conferred the Navratna PSU
status in June 2007.
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Products:

Defence : Defence communication products, Land based radars, Naval

systems, Avionics, Electro Optics, Tank and Armoured Fighting Vehicle
Electronic Systems, Weapon Systems, Shelters and Masts, Simulators,
Batteries, Components/Devices.

Non-Defence : E-Governance systems, Homeland security, Civilian Radars,

Turnkey Projects, Components/Devices, Telecom, Broadcast Systems,
Ventilators. BEL also provides services such as Designing, Machining,
Fabrication and Assembly.

Subsidiaries: BEL Optronic Devices Limited, BEL-Thales Systems Limited, GE

BE Private Limited (Associate) and Defence Innovation Organisation
(Associate).
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Key Rationale
Established player in defence electronics – Bharat Electronics Ltd (BEL) is
a Navaratna enterprise having 37% market share in Indian Defence
Electronics. The company caters to all the three faculties of defence i.e.,
Army, Air Force and Navy. BEL’s core capabilities are in radar & weapons
systems, defence communication & electronic warfare. The company has
a rich history of being a beneficiary in supplying equipment in
collaboration with DRDO to the MoD. With a strong base of nearly 50%
scientists & engineers and an established local vendor base, the company
boasts of quality research in the defence space, with a huge capex going
into R&D. Given BEL’s niche technological & execution capabilities and
government focus on indigenisation and increasing use of electronics in
warfare, higher opportunities in large projects is likely.
Robust order book – Order Inflow came in at Rs.15280crs (up 17%) in FY21.
The company has a healthy order book position of Rs. 53434crs (4x FY21
sales) as on FY21. Ordering pipeline remains robust across segments such
as electronic warfare system (~Rs.15000crs opportunity size), army
equipment’s like Akash weapon system, QRSAM, LRSAM, MRSAM
(Rs.25000-30000crs) and naval equipments like surveillance system,
radars, navigation system (~Rs.15000-20000crs) etc. Given strong bid
pipeline (~Rs.25000crs), Management guided Order Inflow of
Rs.15000-17000crs with healthy revenue growth of 15- 20% YoY and EBITDA
margins in 20-22% range for FY22.
Opportunities in Non-Defence segment – The company expects to
increase the share of non-defence revenue to 25% in the revenue-mix
over the next 2-3 years. After supplying 30,000 ventilators in the beginning
of the fiscal, the company received order for supply of 25,000 oxygen
concentrators in the healthcare sector. The company has signed an MoU
with Delhi Metro Corporation for supply of various automation coach
products and traffic control equipment. The New Jersey-based electric
car maker Triton has roped in India’s state-owned BEL to make batteries.
The much-awaited memorandum of understanding (MoU) has been
signed where Triton will provide the know-how and BEL will make them.
Financials – The company continues to impress with a 9% YoY revenue
growth and 150bps YoY EBITDA margin expansion to 23% in FY21. The PAT
growth is at 15% YoY with profit crossed Rs.2000cr levels in FY21. BEL being a
zero-debt company is able to maintain its working capital without
external borrowings and has a cash position of Rs.3016crs in FY21. The
company spent Rs.460crs capex in FY21 (vs. target of Rs.500). It plans to
start 4 new plants in Hyderabad, Nagpur, Numaligarh and Anantpur. Each
plant would require an investment of around Rs.200 and should be
completed within 12-18 months.
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Industry Analysis

India’s defence manufacturing sector has been witnessing a CAGR of 3.9%

between 2016 and 2020. The Indian government has set the defence
production target at US$ 25.00 billion by 2025 (including US$ 5 billion from
exports by 2025). Defence exports in India was estimated to be at US$ 1.29
billion in 2019-20. India’s defence import value stood at US$ 463 million for
FY20 and is expected to be at US$ 469.5 million in FY21. Defence exports in
the country witnessed strong growth in the last two years. India targets to
export military hardware worth US$ 5 billion (Rs. 35,000 crore) in the next 5
years. As of 2019, India ranked 19th in the list of top defence exporters in the
world by exporting defence products to 42 countries.

Growth Drivers
The government announced measures under the ‘Make in India’ initiative,
including raising foreign direct investment (FDI) limit from 49% to 74% via
the automatic route; this resulted in significant FDI inflows in the defence
and aerospace sector.

The Indian government has set the defence production target at US$ 25.00
billion by 2025 (including US$ 5 billion from exports by 2025). Introduced
Green Channel Status Policy (GCS) to promote and encourage private
sector investments in defence production to promote the role of private
sector in defence production.

India’s defence budget for 2021-22 is Rs.478,195.62 crore (US$ 65.64 billion),
18.75% higher than the budget estimates FY21. The total allocation for
defence services and other organisations/departments under the Ministry
of Defence for FY22 is Rs. 362,345.62 crore (US$ 49.74 billion) (excluding
defence pension), an increase of Rs. 24,792.62 crore (US$ 3.40 billion) over
FY21.
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Peer Analysis
Competitors: Honeywell Automation and BEML

No peer is a direct competition towards Bharat Electronics Ltd until new

private players emerge. BEL has a supply chain of more than 13,000
vendors. Such a deep vendor base is a competitive advantage against
relatively new private‐sector players, who will require continuity in
orders and over 5‐10 years to develop such a supplier base.

Outlook
The recent initiatives by the Government like “Make in India” and
“Atmanirbhar Bharat” provides humongous opportunity to the company
as the reliance on imports for the defence sector would reduce which in
turn would help the company. BEL has competitive advantage due to its
strong in-house capabilities and joint R&D focus with DRDO. BEL has
also been exploring opportunities for growth in allied defence and
non-defence areas like healthcare which includes ventilators,
oxygen concentrates. Also working in smart city projects, airport,
vehicle charging infra and also plans to manufacture Lithium cells.
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Valuation
Overall, BEL’s strong execution in FY21 is expected to keep the momentum
going in coming years despite short term challenges. The expected double
digit revenue growth, sustainable margins, better order inflows and strong
order book of Rs.53434 crore suggests strong performance in the long term.
Also, strategy to diversify into non-defence areas, focus on increasing
exports and services share would aid long term growth and help de-risk its
business model. Hence, we recommend a BUY rating in the stock with the
target price (TP) of Rs.212, 21x FY22E EPS.

Risks
Threat of new entrants - Defence sector has been opened up to the
private sector. Threat of competition from private players like L&T, Bharat
Forge etc who are nimble footed exists.

Delay in execution - Any disappointment on order inflows and execution

delays may significantly affect overall operating performance. Delay in
execution of key projects due to the pandemic and cut in Government
spending on defence and non-defence areas.

Any downward revision - Any downward revision in defence spending by

government may lead to some deferral of receivables payments to
defence PSUs. Back-ended payments from government, long-dated
contracts and negligible advances in new contracts are leading to
increase in working capital.

Source – Tickertape, Company’s Website, BSE Website.

Thanks & Regards

Abeshek C V
Equity Research Analyst – Fundamental
Equity Research Desk
FundsIndia.com
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