Buy This Large Cap Navratna Stock As Share Price Can Surge, Check Target Price Here

Sharekhan is bullish on Bharat Electronics Limited (BEL), a large-cap Navratna Company under the Ministry of Defense, Government of India. The brokerage recommends buy the stock of the company for an estimated target price of Rs 390 apiece. The brokerage claims BEL's market capitalization is Rs 79,347.65 crore.

BEL is focused on diversifying its revenue base by pursuing non-defence opportunities in homeland security, smart city, energy storage products, solar, space electronics, network, and cyber security. Further, growing exports (~60% CAGR over FY2022-FY2024E) shall also aid revenue growth.

Stock Outlook

The current market price (CMP) of Bharat Electronics is Rs 328.35 apiece, trading 0.83% up from its previous close at the time of writing. It opened at Rs 326.40. The stock's 52-week low level is Rs 183.45 apiece and the 52 week high level is Rs 333.80 apiece. Stock trading near 52 Week high level.

Returns on investment over the year

In the past 1 week, the stock of the company moved up by 6.25%. Whereas, in the past 1 and 3 months, it has given positive returns of 17.93% and 33.79%, respectively. Over the past 1 year, the stock surged 66.62% and over the past 3 years, it gave a multibagger return of 198.62%, respectively. In the past 5 years, the stock gave a return of 85.12%.

Promising long-term bet

Over the past few years, India has been among the top importers of defence equipment. India is the third-largest military spending country globally and has accounted for almost 3.7% of global military spending. India's defence sector is undergoing major reforms as the government is keen on strengthening the nation's defence prowess by reducing dependence on imports. As a result, India has significantly reduced its reliance on imports through encouraging indigenous design and manufacturing of defence equipment by various state-owned companies such as Bharat Electronics Limited (BEL), Hindustan Aeronautics Limited (HAL), and private players. The Indian government has set an ambitious defence production target at US$25 billion by 2025 (including US$5 billion from exports by 2025). Measures such as simplification of the 'Make' procedure for procurement of defence products, provision for funding of up to 70% of product development, and ban on import of many key components have encouraged indigenisation. "We believe BEL is a formidable play on India's defence story, given its indigenisation capabilities, healthy order book, promising order inflow pipeline, and strong execution capabilities," the brokerage has said.

 

Strong order book and promising order intake pipeline

BEL boasts of a strong order book of Rs. 56,450 crore, which provides revenue visibility of more than three years. Over 90% of its revenue comes from the government's defence orders. Moreover, the company has a promising order inflow pipeline (Rs. 20,000 crore order inflow expected in FY2023E) and has guided for ~15% revenue growth for FY2023. Since August 2020, the government has notified more than 300 items comprising various complex defence systems and equipment, to be procured only from Indigenous manufacturers. Hence, the total opportunity size has increased to Rs. 2 lakh crore for the next five to six years. BEL, which has indigenised 78% of its revenue, stands to benefit from increasing defence capital outlay of India as well as emphasis on indigenisation of defense equipment.

Non-defence businesses/exports offer strong growth potential

BEL has ventured into several non-defence areas such as homeland security, smart city, energy storage products, solar, space electronics, network and cyber security, and healthcare solutions. BEL has scaled up its operations from cell/module manufacturing to execution of solar power plant projects under engineering procurement construction (EPC)/developer mode. The company also aims to increase revenue share in the services business (currently ~10%) through new business models such as OPEX, GOCO, leasing, and product support services. BEL has also been focusing on exploring exports (primarily non-defence currently) potential of defence electronics products and systems, which bodes well for revenue diversification. The company targets 10-15% revenue contribution from exports (currently ~2%) going forward. Currently, the exports order book stands at US$272 million. The company received order intake of $179 million in FY2022. We expect BEL's exports to post a CAGR of ~60% over FY2022-FY2024E.

 

Cost-control measures, recent developments

As per the FY2022 annual report, BEL has focused on cost-control measures and extensive indigenisation efforts to improve profitability. In the past five years, it met its entire working capital needs through internal accruals. The company's cash flow from operations has grown from Rs. 108 crore in FY2017 to Rs. 4,160 crore in FY2022. Further, despite significant topline growth, its inventory turnover has declined from 206 days in FY2017 to 133 days in FY2022. Similarly, receivable turnover has reduced from 180 days to 148 days during the same period. Moreover, BEL has signed an MoU with UK-based Smiths Detection, a global leader in threat detection and security inspection technologies, for offering advanced, high-energy scanning systems to the Indian market. NHPC Ltd. has signed an MOU with BEL for setting up a 1,000 MW solar manufacturing unit in India. BEL has signed another MoU with Defense Initiatives (DI), Belarus, and Defense Initiatives Aero Pvt. Ltd., India (a subsidiary of DI Belarus), for the supply of Airborne Defense Suite (ADS) for Indian Air Force's helicopters. ADS is used for providing protection to helicopters. The MoU also aims to explore various business opportunities for India and global markets for ADS.

Revision in estimates

"We have revised our earnings estimates upwards, factoring in better revenue growth and profitability," the brokerage has said.

Maintain Buy with a revised PT of Rs. 390

BEL would play a significant role in the successful implementation of the government's Make in India and Atmanirbhar Bharat initiatives as it is one of the key defence and aerospace players. Further, global defence companies are tying up with indigenous players, as there is tremendous export potential for engineering services and components sourcing from India, which bodes well for BEL. BEL continues to invest heavily on capex (Rs. 750 crore capex expected in FY2023) and has considerable expenditure in research and development (R&D, 6-7% of revenue). Further, the company plans to set up a semiconductor fabrication plant in consortium with Hindustan Aeronautics Limited (HAL) and other companies, which would further reduce dependency on imports in the long term. "BEL has strong manufacturing and R&D base, robust order book, healthy order prospects, diversifying revenue stream, and strong balance sheet with good return ratios. We retain Buy on the stock with a revised price target (PT) of Rs. 390," the brokerage has said.

 

Key Risks

1. Delayed order execution and slower pace of fresh orders can affect revenue growth.

2. Higher raw-material prices and shortage of some key components such as semi-conductors could affect execution and earnings going forward.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.