PL Stock Report: Bharat Electronics (BHE IN) - Q1FY24 Result Update - Strong quarterly performance; outlook intact - Downgrade to 'Accumulate'

Bharat Electronics (BHE IN) - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: ACCUMULATE | CMP: Rs130 | TP: Rs140

Q1FY24 Result Update - Strong quarterly performance; outlook intact

Quick Pointers:

§ Order book stands strong at Rs653.6bn, up 18.1% YoY (3.1x TTM revenue).

§ Key large orders prospects for 9MFY24 stands at ~Rs70-75bn from Electronic warfare, equipment for shipbuilding, fuses etc.

Bharat Electronics (BEL) reported strong quarterly performance with revenue growth of 12.8% YoY and EBITDA margins expanding 243bps YoY to 18.9%. Q1FY24 revenue contribution from non-Defence segment stands at ~25%, mainly due to supply of EVM machine. We expect order inflows momentum (Rs81bn in Q1FY24; management guidance of Rs200bn for FY24) to continue, given strong order pipeline for orders such as equipments for shipbuilding programs with CSL and GRSE (~Rs60bn), Fuse requirement for Indian Army (Rs45bn for 10 years) and Electronic warfare (~Rs10-Rs15bn). Management maintained its FY24 revenue growth guidance of 16-17% and EBITDA margin of 21-23%.

We remain positive on long-term growth story of BEL given 1) strong order backlog & order pipeline 2) diversification in newer business verticals like, hydrogen fuel cell, EV batteries etc., 3) focus on export markets (Egypt, Malaysia etc.) and 4) govt’s focus on product indigenization. The stock is currently trading at PE of 28.1x/23.5x FY24/25E. Consequently, we revise our TP to Rs140 (Rs125 earlier) valuing it at 25x FY25E EPS (23x earlier), factoring in strong order inflows sustainability aiding healthy revenue visibility. However, given the recent sharp run up in stock price, we change rating to ‘Accumulate’ from Buy, maintaining long term positive view.

Healthy revenue and margins drives profitability: Standalone revenue grew ~12.8% YoY to Rs~35.1bn (PLe ~Rs35bn) led by healthy order book execution. Q1FY24 revenue contribution from non- Defence segment stands at ~25%, mainly due to supply of EVM machines. EBITDA grew 29.4% YoY to Rs6.6bn (PLe ~Rs6.3bn), with EBITDA margins expanding 243bps YoY to 18.9% (PLe 18%), mainly due to gross margin expansion (43.5% vs 41.9% in Q1FY23). PAT grew 23% YoY to Rs5.3bn (PLe Rs4.6bn), owing to strong operational performance. Other income declined 11% YoY to Rs1.4bn in Q1FY24.

Order backlog stands strong at Rs653.6bn: Q1FY24 order inflows came in at ~Rs81bn, with order wins such as 2 Regiments of Improved Akash Weapon System (AWS), Shakti EW & Sanket MK III (Naval Systems) supply of Long Range Guidance Kit with Warhead, Airborne etc. Order book stands strong at Rs653.6bn, up 18.1% YoY (3.7x TTM revenue). Split between products and services stands at 90%/10% respectively. Off the total order book ~6% comes from Non- Defence segment, with execution time frame of ~1-2 years.

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