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1
Jun 06, 2018
Bharat Electronics Ltd
India Research - Stock Broking
BUY
Recommendation (Rs.)
CMP (as on Jun 06, 2018) 116
Target Price 141
Previous Target Price 189
Upside (%) 21
Stock Information
Mkt Cap (Rs.mn/US$ mn) 279.48 / 4.17
52-wk High/Low (Rs.) 193 / 110
3M Avg. daily value (Rs. mn)
635.6
Beta (x) 0.7
Sensex/Nifty 35179 / 10685
O/S Shares(mn) 2436.6
Face Value (Rs.) 1.0
Shareholding Pattern (%)
Promoters 66.8
FIIs 6.4
DIIs 17.9
Others 8.9
Stock Performance (%)
1M 3M 6M 12M
Absolute (10) (24) (35) (24)
Relative to Sensex (11) (28) (40) (33)
Source: Bloomberg
Relative Performance*
Source: Bloomberg; *Index 100
Analyst Contact
De Arul Kaarthick
040 - 3321 6280
arul.kaarthick@karvy.com
For private circulation only. For important information about Karvy’s rating system and other disclosures
refer to the end of this material. Karvy Stock Broking Research is available on Thomson Reuters &
Bloomberg (Code: KRVY<GO>)
Exhibit 1: Valuation Summary
YE Mar - Consolidated (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Net Sales 73538 86683 104008 117434 130821
EBITDA 13893 17870 20352 21344 26325
EBITDA Margin (%) 18.9 20.6 19.6 18.2 20.1
Net Prot 13368 15234 14310 16361 19108
EPS (Rs.) 5.5 5.9 5.8 6.7 7.8
RoE (%) 15.3 17.9 18.2 18.6 18.3
PE (x)* 22.2 26.3 24.3 17.3 14.8
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
Subdued Performance in Q4FY18
Bharat Electronics (BEL) revenue dropped by 9.5% on YoY basis to Rs. 36 bn on
account of slower execution in Q4FY18. Earnings for the same period dropped
sharply ~29% on YoY basis to Rs. 5.6 bn largely on account of product mix. During
the year, BEL completed its buyback program for which it spent about Rs. 3.7 bn
(~0.83% of equity) and RoE improved marginally to 18.2% by FY18. Going forward,
we expect large inow of orders (Akash & LRSAM) and pickup in execution (EVM
& VVPAT). We expect revenue to grow at 12% CAGR and earning to grow at 16%
CAGR in the next two years. We estimate EPS to reach Rs. 7.8 by FY20E. Over
the last six months, BEL has seen signicant price correction (~35%) which in
our view is overdone since we believe margins may not be reaching FY11-12
levels. We continue to maintain ‘BUY’ on BEL, however, assign a lower multiple to
accommodate for possible stress to margins in H1FY19E, which could start easing
from H2FY19. We value BEL at 18x (5 year 1 yr forward earnings) of FY20E EPS for
a target price of Rs. 141. Key risk to our call is margin prole of non-defence related
orders to be executed in H1FY19.
Order inflow momentum to pick-up: FY18 inows was subdued at ~Rs. 100 bn
and backlog reached 4x of ttm revenues to ~Rs. 401 bn. Given the pattern of Capital
budget spending by armed forces we expect the spillover Akash and LRSAM order
to be booked before H1FY19E. Exports backlog reached ~$93 mn in FY18. We
believe overall inows could reach ~Rs. 120-130 bn in the next two years.
Revenue and earnings to expand in FY19-20E: BELs order backlog for
FY18 stands at 4x ttm revenues. We believe FY19E revenue could be more evenly
distributed on quarterly basis and overall revenue growth in next two years could be
~12% and reach ~Rs. 131 bn by FY20E. We have slightly tweaked FY19E margin
and expect the same to normalize in FY20E. We estimate EPS to grow by 16% in
next two years to Rs. 7.8.
Valuation and Risks
BEL enjoys a revenue market share of ~40%-45% of defence electronics spends
and the current order book oers strong revenue visibility. We believe earnings to
expand by 16% CAGR in the next two years and the recent correction is overdone.
Hence, we maintain our ‘BUY’ rating for a target price of Rs. 141 by valuing BEL at
18x FY20E EPS. Key risk to our call is margin prole of non-defence related orders
to be executed in H1FY19.
Earnings Revision (%)
YE Mar FY19E FY20E
Sales (%) (3.5) (2.2)
EBITDA (%) (24.4) (16.5)
PAT (%) (18.0) (13.5)
Source: Karvy Research
L
L
L
L
L
L
Company Update
Industrials - Aerospace & Defence - Aircraft & Parts
Bharat Electronics Ltd
Bloomberg Code: BHE IN
60
75
90
105
120
Jun-17
Jul-17
Aug -17
Sep-17
Oct-17
Nov-17
Dec-17
Jan-18
Feb-18
Mar -18
Apr-18
May-18
Jun-18
Bharat Electr onics Ltd
Sensex
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Jun 06, 2018
Bharat Electronics Ltd
Exhibit 2: Q4FY18
YE Mar - Standalone (Rs. Mn) Q4FY18 Q3FY18 QoQ % Q4FY17 YoY %
Turnover 36085 25128 43.6 39877 (9.5)
Expenditure 28123 20677 36.0 30081 (6.5)
EBITDA 7962 4452 78.9 9796 (18.7)
Depreciation 766 594 29.0 571 34.1
EBIT 7196 3858 86.5 9225 (22.0)
Interest 10 0 4750.0 9 9.0
PBT 7186 3858 86.3 9216 (22.0)
Other Income 279 492 (43.3) 909 (69.3)
Ta x 1878 1322 42.1 2208 (14.9)
PAT 5587 3028 84.5 7917 (29.4)
EBITDA Margin (%) 22.1 17.7 435 bps 24.6 (250) bps
EBIT Margin (%) 19.9 15.4 459 bps 23.1 (319) bps
Net Prot Margin (%) 15.5 12.1 343 bps 19.9 (437) bps
Source: Company, Karvy Research
Exhibit 4: Bharat Electronics - 5yr PE Valuation
Source: Company, Karvy Research
Exhibit 5: S&P BSE Capital Goods Index - 10yr PE Valuation
Source: Company, Karvy Research
Exhibit 3: Change in Earnings Estimates
YE Mar - Consolidated (Rs. Mn)
FY19E FY20E
Old New % Change Old New % Change
Net Sales 121643 117434 (3.5) 133808 130821 (2.2)
EBITDA 28247 21344 (24.4) 31526 26325 (16.5)
EBITDA Margin (%) 23.2 18.2 (505) bps 23.6 20.1 (344) bps
Adj. PAT 19957 16361 (18.0) 22096 19108 (13.5)
EPS (Rs.) 8.1 6.7 (17.1) 9.0 7.8 (12.9)
Source: Karvy Research
5
10
15
20
25
2014
2015
2016
2017
1 Yr Fwd P/E
Average
+1 SD
-1 SD
19
24
29
34
39
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
S&P BSE Capital Goods Index
Averag e
+1SD
-1SD
3
Jun 06, 2018
Bharat Electronics Ltd
Consolidated Financials
Exhibit 6: Income Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Revenues 73538 86683 104008 117434 130821
Growth (%) 3.7 17.9 20.0 12.9 11.4
Operating Expenses 59645 68814 83656 96090 104496
EBITDA 13893 17870 20352 21344 26325
Growth (%) 18.3 28.6 13.9 4.9 23.3
Depreciation & Amortization 1920 2116 2717 2926 3538
EBIT 11974 15753 17635 18418 22788
Interest Expenses 60 129 22 85 95
Other Income 5395 4201 1957 4124 3960
PBT 17308 19826 19570 22457 26653
Tax 4272 4855 5498 6333 7783
Adjusted PAT 13368 15234 14310 16361 19108
Growth (%) 11.7 14.0 (6.1) 14.3 16.8
Source: Company, Karvy Research
Exhibit 7: Balance Sheet
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
Financial assets 112283 84782 79514 78350 87977
Inventory 41570 48817 46158 54198 58626
Investments 4623 5759 9915 9915 9915
Gross Block 14219 19024 23281 27820 32223
Net Block 12320 15011 18390 23965 29427
CWIP 4298 7428 9401 9401 9401
Miscellaneous 10949 12693 21772 21772 21772
Total Assets 186043 174490 185149 197600 217117
Current Liabilities & Provisions 91414 93386 99437 96436 97849
Debt 286 1739 3461 3461 3461
Other Liabilities 1882 2008 2094 2094 2094
Total Liabilities 93534 96995 104862 101860 103274
Shareholders Equity 2400 2234 2437 2437 2437
Reserves & Surplus 90062 75124 77720 93172 111276
Total Networth 92462 77358 80157 95609 113713
Total Networth & Liabilities 186043 174490 185149 197600 217117
Source: Company, Karvy Research
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Jun 06, 2018
Bharat Electronics Ltd
Exhibit 8: Cash Flow Statement
YE Mar (Rs. Mn) FY16 FY17 FY18 FY19E FY20E
PBT 17640 20089 19808 22694 26890
Depreciation 1920 2116 2717 2926 3538
Interest (60) (129) (22) (85) (95)
Tax Paid (4303) (6883) (5408) (6333) (7783)
Inc/dec in Net WC 12180 37140 1651 (11041) (3015)
Other Income (4606) (4201) (1957) (4124) (3960)
Others (170) (6) (194) (67) (48)
Cash ow from operating activities 22601 48127 16594 3970 15527
Inc/dec in capital expenditure (6593) (7938) (8069) (8500) (9000)
Inc/dec in investments (12785) (1136) (4155) 0 0
Others 4675 4201 1957 4124 3960
Cash ow from investing activities (14703) (4873) (10267) (4376) (5040)
Inc/dec in borrowings 37 (275) 504 0 0
Dividend paid (2945) (6834) (7837) (672) (766)
Interest paid (60) (129) (22) (85) (95)
Others (209) (23395) (4242) 0 0
Cash ow from nancing activities (3177) (30633) (11596) (757) (861)
Net change in cash 4720 12621 (5269) (1163) 9627
Source: Company, Karvy Research
Exhibit 9: Key Ratios
YE Mar FY16 FY17 FY18 FY19E FY20E
EBITDA Margin (%) 18.9 20.6 19.6 18.2 20.1
EBIT Margin (%) 16.3 18.2 17.0 15.7 17.4
Net Prot Margin (%) 16.9 16.8 13.5 13.5 14.2
Dividend Payout Ratio (%) 300.8 32.8 34.3 34.1 33.3
Net Debt/Equity (x) (0.8) (1.1) (0.9) (0.8) (0.7)
RoE (%) 15.3 17.9 18.2 18.6 18.3
RoCE (%) 14.1 19.0 16.8 16.3 16.1
Source: Company, Karvy Research
Exhibit 10: Valuation Parameters
YE Mar FY16 FY17 FY18 FY19E FY20E
EPS (Rs.) 5.5 5.9 5.8 6.7 7.8
DPS (Rs.) 16.5 2.0 2.0 2.3 2.6
BVPS (Rs.) 37.9 31.7 32.9 39.2 46.7
PE (x)* 22.2 26.3 24.3 17.3 14.8
P/BV (x)* 3.2 4.9 4.3 3.0 2.5
EV/EBITDA (x)* (3.1) (2.5) (2.0) (2.2) (2.1)
EV/Sales (x)* (0.6) (0.5) (0.4) (0.4) (0.4)
Source: Company, Karvy Research; *Represents multiples for FY16 - FY18 are based on historic market price
5
Jun 06, 2018
Bharat Electronics Ltd
Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5-15%
Sell : < 5%
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