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LKP ResearchAshwin Patil | [email protected]+91 22 6635 1271

Proxy to India’s Defence StoryBharat Electronics | Defence

Price Performance (%)

(%) 1M 3M 6M 1YR 2YR

BEL -3% -17% -39% -24% -45%

NSE Nifty 2% -24% -23% -18% -15%

* To date / current date : 15-May-20

Shareholding pattern (%)

(%) Mar-20 Dec-19 Sep-19 Jun-19

Promoter 51.14 55.27 55.93 58.83

FPIs 10.71 12.20 11.43 8.91

MFs 25.11 19.69 19.24 17.43

FI's / Banks 0.37 0.37 0.37 0.38

Insurance 4.73 5.22 5.42 4.03

Others 7.94 7.25 7.61 10.42

Rating Buy

Current Market Price(₹) 68

12 M Price Target (₹) 100

Potential upside (%) 47

YE Mar FY 18 FY 19 FY 20E FY 21E FY 22E

Total sales(₹ bn) 103.2 120.8 107.4 115.1 130.0

EBITDA margins (%) 16.9% 22.5% 18.6% 18.0% 22.2%

PAT margins (%) 13.6% 15.9% 12.8% 12.2% 15.4%

EPS (₹) 5.8 8.0 5.7 5.8 8.4

P/E (x) 11.6 8.5 11.9 11.6 8.1

P/BV (x) 2.1 1.8 1.6 1.5 1.3

EV/EBITDA (x) 8.9 5.7 7.7 7.5 5.3

ROE (%) 18.0% 21.4% 13.7% 12.8% 16.2%

ROCE (%) 18.2% 25.2% 16.3% 15.0% 19.2%

Dividend yield (%) 5.0 3.4 2.5 2.6 3.7

Initiating CoverageMay 17, 2020

Bharat Electronics (BEL), a government owned defence company, is a leader in supplying electronics based equipments to all the three faculties of defence – Army, Airforce and Navy. The company has a rich history of being a beneficiary in supplying equipments 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. BEL has a humongous order book of ₹518 bn to be delivered over the next 3-4 years, which itself provides a robust outlook and visibility over long term. We believe a cut in defence budget may impact the receivables in FY 21 in view of Covid-19, but BEL has demonstrated strong execution capability over the years and will be able to weather this storm. As announced yesterday, increase in FDI limit to 74% from 49% may offer a positive surprise. On the margins front, we believe that the new margin norms may have a little impact as we believe BEL to offset this through faster localization driven by large project sizes and a growing share of Service revenues. Management highlighted the growing trend amongst armed forces to outsource upkeep of equipment to OEM’s such as BEL. This will result in a strong and continuous stream of revenues from Services. With FY 21 expected to be a slightly subdued year, we believe FY 22 to witness a bump up in business due to deferment of execution and postponement of deliveries on the back of current pandemic. In line with this, based on FY 22E, we initiate a coverage on BEL with a BUY rating and a target of ₹100 (12x times FY 22E earnings).

Huge order book and pipeline projects provides a clear visibility over next 3-4 yearsBEL has a huge order book to the tune of ₹518 bn to be executed over next 3-4 years. In FY 20, there was lumpiness in revenues due to supply of EVM/VVPAT machines to GOI on the back of general elections. In FY 21E, we may witness softness in revenues due to cut back in defence budget and Covid-19. However, BEL with its vast experience and expertise, may overcome this tough time. With a strong pipeline of projects and new orders such as Akash, CIWS, MSRAM, QRSAM etc , we expect from second half of FY 21 onwards into FY 24, BEL to witness a strong business.

Higher emphasis on R&D as big indigenous projects are on the radarBEL plans to raise its R&D expenditure to 10-12% of sales from current 9.1%. As large indigenous projects co-developed with DRDO reach maturity BEL’s R&D investment should increase. 47% of its engineering manpower is engaged in R&D. BEL is also DRDO’s largest R&D partner. The company has incurred capex to develop capabilities in super components, test set up for missile electronics, EMI/EMC facilities and electro optics. In Radar – MRSAM and QRSAM, Missile Seekers- Akash 1S, Astra and Nag, Communication systems - Software defined radios and Electronic warfare- Himshakti and Fighter suites are some of the projects where BEL will invest in the near term, these projects alone offer US$ 10bn of opportunities in the next 5-7 years.

EBITDA margins to rise again in FY 22ESignificant indigenization, better operating leverage, bounce back post Covid-19, increasing contribution from Services revenues will offset new margin norms related margin pressure. Additionally, the new projects will be back ended when the higher execution rate shall take care of the impact of new margin norms. We believe margins to lie in 19-22% range between FY 20-22E.

BEL vs NSE Nifty

0

20

40

60

80

100

120

140

May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20

Bharat Electronics Nifty 50

Stock Data

FV (₹) 1

Market Cap Full (₹ bn) 16,508

Market Cap Free Float (₹ bn) 7,429

52-Week High / Low (₹) 122 / 56

2-Year High / Low (₹) 131 / 56

1 Year Avg. Dly Traded Volume (in lakh) 125

BSE Code / NSE Symbol 500049 / BEL

Bloomberg BHE IN

LKP Research 2

Bharat Electronics | Initiating Coverage

Company ProfileBEL is a government-owned leading defence electronics company. Set up in 1954, BEL now produces

state-of-art equipment in defence communication, radar, naval systems, electronic warfare, electro

optics, and C4I systems. It also manufactures civilian products such as electronic voting machines.

BEL has a strong manufacturing base with nine factories across India. About 50% of its 9,612

employees are scientists/engineers and it invests 9-10% of its annual revenues on R&D. As a result

of this extra focus on research, ~96% of turnover comes from sale of indigenous products and

only 4% from Transfer of Technology (ToT) from foreign OEMs. Over the years, BEL has become a

technologically advanced multi-product company. Typically, about 85% of its revenues come from

defence sector, while 15% comes from non-defence business. BEL two subsidiaries – BEL Optronic

Devices Ltd & BEL-Thales Systems Ltd.

ProductsThe major products manufactured by BEL come under the following sections-

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.

Key projects executed in FY20 Command & Control Systems, Thermal Imagers for tanks, Upgrades of communication systems,

Land-based EW systems, Weapon Repair Facility, Electronic Fuses, various Radars, Smart City

Projects, Delhi CCTV project, Schilka upgrade, Avionics Package for LCA, Classroom Jammers, Real

Time Information System for Railways and LRSAM. The total order inflow in FY 20 has been ₹130 bn.

Projects70%

Prodcuts30%

Radars

Naval Systems Electro Optics Tank Electronics & GunWeapon System upgrades Civilian Products

Defence CommunicationsMissile Systems Electronic Warfare &Avionics

Network Centric Systems(C4ISR)

BHARAT ELECTRONICS LTD

Source: Company, LKP Research


LKP Research 3


BEL designs, develops and manufactures a range of products in the following fields

DEFENCE COMMUNICATION PRODUCTS

• VLF / HF Receivers (Rx)

• HF Transceivers

• VHF-Handheld

• VHF - Man Pack/Vehicular

• VHF - Base Station

• UHF - Handheld

• UHF - Base Station

• V / UHF - Manpack

NAVAL SYSTEMS

• Radar Systems

• Sonar Systems

• Fire Control Systems

• Naval Communication Systems

AVIONICS

• Ground Control Station And Datalink For UAV

• Cockpit Modules For Light Combat Aircraft (LCA)

• Flight Control System For Light Combat Aircraft (LCA)

TANK & ARMOURED FIGHTING VEHICLE ELECTRONIC SYSTEMS

• VHF Transreceiver

• Cockpit Modules For Light Combat Aircraft (LCA)

• Nuclear Biological Chemical Reconnaisance Vehicle (NBCRV)

• Air Defence Weapon Station

• Instant Fire Detection & Suppression System

ELECTRONIC WARFARE SYSTEMS

• Radar Electronic Support Measures(Esm) Systems

• Elint / Comint / Sigint

• Integrated Electronic Warfare Systems

• Jammers

LAND-BASED RADARS

• Surveillance Radars

• Fire Control Radars

• Weapon Locating Radars

• Secondary Surveillance Radars

ELECTRO OPTICS

• Laser Range Finders (LRF)

• Night Vision Devices

• Weapon Sights

• EO Systems

WEAPON SYSTEMS

• Akash Missile System

• L 70 Gun Upgradation

• Schilka Upgrade

DEFENCE

LKP Research 4


C4I SYSTEMS

• Artillery Combat Command Control System (ACCCS)

• Battlefield Surveillance System (BSS)

• Combat Management System (CMS)

• Coastal Surveillance System (CSS)

• Air Defence Control and Reporting System (ADC&RS)

• Accessories

SIMULATORS

• Air Defence Weapon Simulator System

• Simulator for L70 Gun Upgrade

• Aircraft Recognition Trainer (ART)

• Upgraded Indigenous Forward Observer Simulator (UIFOS)

• 81mm Mortar Simulator

COMPONENTS / DEVICES

• Microwave Tubes

• Microwave Supercomponents

• Hybrid Micro Circuits (HMCs)

ELECTRONIC MANUFACTURING SERVICES (EMS)

• PCB assembly (SMT, Through Hole, BGA) and testing)

• Precision Machining and Fabrication

• Opto electronics components and assemblies

• Microwave Integrated Circuit Assemblies

• Super Components Modules

BATTERIES

• PRIMARY (NON-CHARGEABLE) BATTERIES

• Lithium Sulphur dioxide(LiSO2)

• Lithium Thionyl Chloride(LTC)• SECONDARY

(RECHARGEABLE) BATTERIES• Nickel Cadmium(NiCd) • Nickel Metal Hydride (NiMH)

SHELTERS & MASTS

• Composite Design Shelter System

• MIL Graded ISO 20 Feet Shelter

• Shelterised CBRN System• Expandable Shelter• Shelterised Nuclear Biological

Chemical Lab• Hydraulically Operated

Telescopic Mast

MICROELECTRO MECHANICAL SYSTEMS (MEMS)

• Pressure Transducers (PT)

• Conductivity Temperature & Depth (CTD) Sensor

• Depth Sensor

ELECTRONIC MANUFACTURING SERVICES (EMS)

• Cable assemblies and wiring harnesses

• Design and manufacturing of professional grade transformers, coils and sub-assemblies

• Antennae manufacturing• Offsets

LKP Research 5


e-Governance Systems

• Electronic Voting Machine

• Citizen Verification Device

• Point of Sale

• Indigenous Smart Phone

Civilian Radars

• Coastal Surveillance Radar

• S-Band Polarimetric Doppler Weather Radar (DWR)

• C-Band Polarimetric Doppler Weather Radar (DWR)

Components / Devices

• PD & Strategic Products• Silicon Radiation Detectors• Passive Vaccum Devices• EMI Filters• Anti Collision Light (ACL)• Multichannel Voice Logging

Recorder (MVLR) System• Digital Multi Channel Data

Recorder 16A

COMMUNICATION SUBSYSTEMS

• 10W L Band Amplifier• 10W X-Band Amplifier• Engineering Order Wire

System• IP Diversity Combiner• IP Modem• L-Band Up and Down

Converter

Turnkey Projects

• Integrated Traffic Management System

• Solar Power Solution

Homeland Security

• Perimeter Intrusion Detection System

• Surveillance System

• Jammers

• X-Ray Baggage Inspection System

Telecom, Broadcast Systems

• Satellite Modem (IDR)• ADSL 2+ Modem• Earth Stations• DSNG Mobile System• Disaster Warning System

OTHER SECURITY SYSTEMS

• Explosive Detector• Road Blocker• Non Linear Junction Detector• Tyre Killer• Non Linear Junction Detector• Under Vehicle Scanning

System

NON DEFENCE

LKP Research 6


Investment ArgumentStrong order book provides long term visibilityBEL has a tall order book of ₹518 bn which is about 4.3x FY 19 revenues. Going forward, large

indigenous projects developed by DRDO will gain maturity. BEL is DRDO’s largest R&D partner. The

company is in process of investing in super components, test set up for missile electronics, EMI/

EMC facilities and electro optics. In Radar – MRSAM and QRSAM, Missile Seekers- Akash 1S, Astra

and Nag, Communication systems - Software defined radios and Electronic warfare- Himshakti and

Fighter suites are some of the projects where BEL will invest in the near term, these projects alone

offer US$ 10bn of opportunities in the next 5-7 years. Key new orders include Akash (7 Sqdn), Coastal

Surveillance Systems (CSS), Upgrade for EW systems, Radars, AMCs for Radars and Weapon systems,

Software Defined Radio (SDR), Sonars, Advanced Communication Systems, etc. This provides strong

revenue visibility over the next 3-4 years. BEL has demonstrated strong execution capability over

the years. In FY 20, the company has given a revenue target of ₹120 bn which seems a bit tough to

achieve considering the cut in GOI’s defence spend and pressure related with Covid-19 pandemic.

We believe this to result in pressure over FY 21 as well with GOI feeling the pinch to pay the defence

companies. However, with this dust settling over FY 22 and materialization of the deferred projects

from FY 20 and FY 21, we believe to see a strong performance in FY 22.

Order Book Position (₹ mn)

216,

170

320,

200

402,

420

401,

150

517,

980

48.1%

25.7%

-0.3%

29.1%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-

100,000

200,000

300,000

400,000

500,000

600,000

FY 15 FY 16 FY 17 FY 18 FY 19

Order book (Rs mn) % yoy


Execution rate to improve in FY 22E

402,

420

401,

150

517,

980

540,

600

550,

000

600,

000

86,1

19

103,

223

120,

846

107,

400

110,

600

130,

000

21.4%

25.7%23.3% 19.9% 20.1%

21.7%

0%

5%

10%

15%

20%

25%

30%

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

FY 17 FY 18 FY 19 FY 20E FY 21E FY 22E

Order book(Rs mn)Revenues (Rs mn)Execution rate (%)


Heavy R&D investment, DRDO connection, wide and deep supply chain provides clean edge over competitionOver the past eight years, while BEL’s total employee base has reduced by 14%, the share of its

technical employees (scientists and engineers) increased to 52% from 33% in this period. Typically,

its employees have an average experience of >10 years, and this has enabled the company to not

only restrict loss of knowledge upon retrials, but also allowed it to adopt new technologies. Also this

has enabled BEL to undertake a multitude of indigenous projects and reduce dependence on ToT.

BEL has a board approval to raise its R&D investments to 10-12% of sales from the current 9.1%. As

large indigenous projects co-developed with DRDO reach maturity, BEL’s R&D investment should

increase. 47% of its engineering manpower is engaged in R&D.

BEL has historically worked closely with India’s defence laboratories, especially on projects in

radars, electronic warfare, and missile systems. In FY19, products co-developed by BEL and DRDO

accounted for ~50% of its revenues. This relationship helps BEL stay ahead of the curve on future

products that the armed forces require.

Considering high barriers to this business and mammoth stature of BEL, the company has built up a

vendor base of more than 13,000. This provides a super moat against relatively new private players,

who will require at least 10 years to develop such a huge vendor base.

LKP Research 7


Scientists and Engineers contribute 52% of total employees

11,1

80

10,7

91

10,3

05

9,95

2

9,70

3

9,84

8

9,71

6

9,72

6

9,61

2

3,67

0

3,69

6

3,86

9

3,99

1

4,04

5

4,59

4

4,67

6

4,86

3

5,02

1

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

EmployeesScientists and Engineers% of employees


R&D Expenses to rise up to 10-12% heron5,

490

7,04

0

7,77

0

9,88

0

10,7

70

8.2%

9.4%

8.8%

9.8%

9.3%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

-

2,000

4,000

6,000

8,000

10,000

12,000

FY 15 FY 16 FY 17 FY 18 FY 19

R&D Expenses (Rs mn)% of Revenues


Long term capex plan to help maintain lead in missile systems, radar systems and optronicsBEL had outlined a capex of ₹23bn over FY17-21 vs. ₹15bn incurred over FY12-16. It has envisaged

a major investment of ₹5bn for a defence-system integration facility in Andhra Pradesh, which will

enable BEL to expand its missile system business. In addition, the company will adopt a new state-

of-the-art XR5 technology for image-intensifier tubes to be used in passive night-vision devices. The

company is primarily focused on maintaining consistent efforts to stay up to date with the latest

technologies and maintain international infrastructure standards. In FY 19, the company incurred a

capex of ₹6.7 bn mainly to establish 1). A shock test facility 2). High temperature test facility and 3).

Surface Mount Technology (SMT) Assembly Line.

Driven by higher capex and investments in R&D, most of BEL’s products are mainly indigenous (96%),

while just 4% comes from ToT.

Capex Outlay

2,823

5,250

6,120 6,340 6,736

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY 15 FY 16 FY 17 FY 18 FY 19

Capex (Rs mn)


BEL has a strong competitive edge, since being a pioneer in defence equipmentsIn India, out of the total defence budget, 60% is spent on product upgrades, 30% on new products

and 10% on state-of-art research. Due to BEL’s involvement in the 1st-generation version of most

radar, communication systems, and electronic warfare systems, it becomes a beneficiary of system

upgrades, which typically account for 30-40% of its annual order inflow. This piece of the business

is mainly free of competition. In addition, the company is also developing new products to meet

demands in missile systems, radars, and tactical communication, which will be growth areas for

the next five years; here too, we see limited competition. We believe that BEL will remain a major

beneficiary of projects in radars, electro optics, electronic warfare, tactical communication, and

missile systems, due to its involvement with legacy programs and its strong knowledge base. We

do not foresee a negative impact of competition on BEL over the next five+ years as the company

remains insulated due to strong entry barriers.

LKP Research 8


Service and non-defence are sustainable growth drivers As mention in above point, India spends 60% of its defence budget to manage obsolescence (the

process of becoming obsolete) as against 25% in USA. From this we can clearly infer that AMC

business has a great, continuous, multi year demand. There ia a growing trend amongst armed

forces to outsource upkeep of equipment to OEM’s such as BEL. As a result, BEL’s orderbook for

service (AMC) has more than doubled to ₹23bn in past two years. AMC from Akash, IACCS and

legacy radars supplied to Airforce and Army should help grow this segment further. Management

reiterated its expectation of spares + service to account for 20%-25% of sales in the next 4-5 years

from 10% currently. We estimate this contribution to be about 15% in FY 22E. Additionally, to

diversify BEL has identified non defence segments such as Homeland Security (HLS), Space, Solar,

Smart City, SAAS, Li-on batteries and Fuel cells. BEL has been able to scale up its orderbook for HLS

to 8% from no exposure two years ago. Management conceded that profitability in civilian projects

would be lower than those in defence, but Services (high margin) should partly offset low margin

projects. Additionally, as news items suggest, BEL is committed to supply 30,000 ventilators to the

Health Ministry in current trying times of Covid-19. This will again raise the contribution from non

defence business similar to FY 19, in which this contribution was at 32%, in line with the VVPAT and

EVMs delivered to the GOI for general elections.

Here are some of the major non-defence opportunities business, which BEL plans to capitalise on -

• Homeland security solutions: BEL is planning to address the border management solution requirements as part of the homeland security business. It is already providing security solutions for Parliament, critical ONGC installments, border perimeter solutions, etc

• Smart Cities: In this segment, BEL will provide smart lighting, smart signalling and integrated electrical control systems for large cities. It is already implementing solutions for large cities like Agra, Belgaum Karnataka), etc

• Solar: BEL is setting up utility scale solar power plants for captive consumption in the estates of ordnance factories at 17 locations across eight states for total capacity of 150 MW. The commissioning of the first solar power plant of 15 MW capacity is expected to happen soon at ordnance factory, Medak. In the near future, this sector is expected to contribute significantly to BEL’s business

• Space: BEL is exploring a collaboration with Indian Space Research Organisation (ISRO) for leveraging their technological capabilities in design and development of various products/

systems for possible use in defence applications

India stresses significantly on obsolescence management

25%

50% 25%

60%

30% 10%

0%10%20%30%40%50%60%70%80%90%

100%

Obsolescence management New projects State of Art Technology

India USA


LKP Research 9


Non-defence contribution has been traditionally between 10 to 15% range

87%82%

88% 85%

68%

90%

13%18%

12% 15%

32%

10%

0%10%20%30%40%50%60%70%80%90%

100%

FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 (9M)

Defense Non Defense


New margin norms may slightly impact margins BEL has been steadily reporting margin in the range of 20% despite several challenges. Under the

new margin norms set by the regulators, PBT margins excluding other income for new projects will

be pegged at 7.5% as compared to earlier 12.5%. Currently, there are ~10% of projects under this

category. There are several other new projects in the pipeline which will add up to revenues FY

22E onwards. As already mentioned above, the delivery schedule of most of the new projects will

be deferred to FY 22, hence the impact of new margin norms will be back ended. Even if it is so,

BEL has managed changes in its business model and the regulatory environment in the past three

decades quite effectively. In addition, we expect it to benefit from faster localization driven by large

project sizes and a growing share of Service revenues. Management expects BEL’s gross margins to

be in the range of 44-49%, depending on the sales mix. With robust top line growth expected FY 22E

onwards, we expect the company to gain from operating leverage and a soft growth in employee

costs. Hence, new norms will at max impact the margins upto 100bps till FY 22E and will not be

materially detrimental to BEL’s long-term margin profile. Management has guided 19-21% EBITDA

margins for FY20E. We project higher margins in 22% range for FY 22E

Indigenisation a key to profitabilityIn the past four years, BEL has won about ten big projects which are collectively worth ~₹375bn

(equivalent to 75% of current order book of ₹518bn). This has allowed the company to localize

technologies and benefit from bulk purchases from vendors. As a result, BEL’s gross margins have

expanded 300 bps over FY16-19, offsetting the impact of higher employee costs due to wage

revision. Earlier, we believed that projects such as IACCS (₹80bn) and EVM/VVPAT (₹30bn) would

be margin decretive due to a high share of outsourced procurement. However, BEL demonstrated

its ability to manage this in the past two years by reporting >16% EBITDA margins on manufacturing

revenues, despite a 20-30% contribution from these two projects. Over the next three years, we

Strong AMC opportunity

Air Force Army Navy

Rohini Bharani MK-II 3D-TCR

Surveillance Radar Element WLR

MPR-Arudhra Indra -I

LLTR BFSR-SR

Aslesha Rajendra

Indra PC

Rajendra


LKP Research 10


believe BEL is on track to win some large projects with an average size of ₹50bn. This should help it to reduce import content further, and achieve better terms with vendors based on higher scale and operating leverage. Currently, as news items suggest, the company is engaged in process of manufacturing ventilators for Covid patients, which may impact margins but it will be interesting to see how BEL arrests the fall if any, since there is still uncertainty regarding the volumes and the

content vendor base.

Proportion of localisation is sturdily increasing

81% 83% 78% 81% 78%85% 80%

86% 87% 89%96%

19% 17%22% 19% 22%

15%20%

14% 13% 11%4%

0%

20%

40%

60%

80%

100%

120%

FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19

Indigenous products ToT from foreign OEMs


New segments offer huge opportunities The company is committed to focus on new areas such as missile seekers, drone guard systems, corner shot weapon systems, unmanned systems and software define radios in the future. Each of these technologies offers large long-term prospects. For instance, Missile Seekers, where BEL’s RF based seekers technology will be deployed in projects such as Akash 1S, QRSAM, Astra and Namica. This will help it to increase its scope in a typical missile program to 40-45% from 30-35% presently. Even for Software Defined Radios, the company has been pre-qualified by the Indian Navy and should be approved by Indian Army in the next 2-3 years. Here the company directly competes with MNCs such as Rafael, Elbit, Rockwell Collins, and LLL Technologies etc

New Products

1 Drone Guard System

2 EO Syztem for Homeland Security

3 Integrated Communication System for Indian Navy

4 Coastal Surveliiance system for Seychelles

5 Fire Control System Kavach

6 Image Intensifier based Passive Night Vision Devices

7 Indigenous Electronic Upgrade for 52 caliber gun

8 Maintenance & Training Support Device for Indian Navy

9 Uncooled Thermal Imager

10 Commander Thermal Imager Sight for BMP

11 IFF System for MRSAM Phase II

12 Virtual Reality Simulator

13 Class Room Jammer

14 Corner Shot Weapon System

15 Battery Multi Function radar Vehicle & Battery Surveillance Radar Vehicle for Missile System

16 Target Acquisition System for Man Portable Anti Tank Guided Missile

17 Ku Band RF Seeker

18 Air Defence Fire Control Radar - ATULYA

19 CMS for MRSAM (IAF)


LKP Research 11


Concerns over Working Capital increases with Covid-19BEL like its Defence PSU peers enjoyed negative working capital historically. However, with a sizeable cut in defence budget for FY 19-20 and FY 20-21, the company may face cash erosion. Also certain corporate actions by the government and growing share of non-defence business would pressurise BEL’s cash flows like they did in FY18-19. Also, the current financial crisis in the form of Covid-19 pandemic has led the GOI to dole out ₹20 lakh crores stimulus package to the affected sections of the country. This may result into further cuts of defence budget and delay in payments to the DPSUs like BEL. Management in its 2019 analyst meet did not rule out taking leverage to fund operations in the near term. A higher than expected NWC is a downside risk to our estimates. FDI hike in defence may act as a positive risk to this argument

Outlook and ValuationBharat Electronics (BEL), a government owned defence company, is a leader in supplying electronics

based equipments to all the three faculties of defence – Army, Airforce and Navy. The company has

a rich history of being a beneficiary in supplying equipments 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. BEL has

a humongous order book of ₹518 bn to be delivered over the next 3-4 years, which itself provides

a robust outlook and visibility over long term. We believe a cut in defence budget may impact the

receivables in FY 21 in view of Covid-19, but BEL has demonstrated strong execution capability over

the years and will be able to weather this storm. As announced yesterday, increase in FDI limit to

74% from 49% may offer a positive surprise.

On the margins front, we believe that the new margin norms may have a little impact as we believe

BEL to offset this through faster localization driven by large project sizes and a growing share of

Service revenues. Management highlighted the growing trend amongst armed forces to outsource

upkeep of equipment to OEM’s such as BEL. This will result in a strong and continuous stream of

revenues from Services. With FY 21 expected to be a slightly subdued year, we believe FY 22 to

witness a bump up in business due to deferment of execution and postponement of deliveries on

the back of current pandemic. Our bullish stance on BEL despite an expected muted performance

this fiscal is further corroborated by the stake increase by Domestic Fund Houses in the last quarter

of FY20. In line with this, based on FY 22E, we initiate a coverage on BEL with a BUY rating and a

target of ₹100 (12x times FY 22E earnings).

LKP Research 12


Balance SheetYE Mar (₹ mn) FY 18 FY 19 FY 20E FY 21E FY 22E

Equity and Liabilities

Equity Share Capital 2,437 2,437 2,437 2,437 2,437 Reserves & Surplus 75,174 87,753 97,342 107,143 121,174Total Networth 77,610 90,189 99,779 109,580 123,610

Total debt 333 0 50 150 200

Long term provisions 8,172 9,214 9,214 9,214 9,214

Deferred tax assets/liabilities -4,312 -4,712 -4,712 -4,712 -4,712

Other long term liabilities 440 969 969 969 969

Current Liab & Prov

Trade payables 14,011 14,350 11,181 12,614 16,027

Short term prov+ borrowings 4,433 4,582 4,582 4,582 4,582

Other current liabilities 80,230 85,330 88,330 91,330 94,330

Total current liab and provs 98,674 104,262 104,093 108,525 114,939

Total Equity & Liabilities 180,917 199,922 209,394 223,726 244,221

Assets

Net block 16,070 20,843 25,983 27,533 30,798

Capital WIP 3,955 2,751 4,051 5,051 6,051

Intangible assets under devt 4,374 4,463 4,463 4,463 4,463

Non current investments 9,033 10,194 10,194 10,194 10,194

Long term loans and advances 2,885 3,022 3,022 3,022 3,022

Other non current assets 2,268 625 625 625 625

Total fixed assets 38,583 41,898 48,338 50,887 55,153

Cash and cash equivalents(i) 7,382 7,219 8,849 7,968 9,538

Bank deposits other than (i) 48 1,620 1,720 1,820 1,920

Inventories 45,513 44,137 41,195 44,779 51,644

Trade receivables 50,495 53,692 54,436 59,915 64,110

Other current assets 21,463 29,845 33,345 36,845 40,345

Short term loans & advances 17,432 21,511 21,511 21,511 21,511

Total current Assets 142,334 158,024 161,055 172,838 189,068

Total Assets 180,917 199,922 209,394 223,726 244,221

Income StatementYE Mar (₹ mn) FY 18 FY 19 FY 20E FY 21E FY 22E

Total Revenues 103,223 120,846 107,400 115,100 130,000

Raw Material Cost 54,811 59,132 56,922 60,428 66,300

Employee Cost 17,723 18,791 21,480 24,171 24,700

Other Exp 13,222 15,690 9,022 9,784 10,140

EBITDA 17,467 27,234 19,976 20,718 28,860

EBITDA Margin(%) 16.9% 22.5% 18.6% 18.0% 22.2%

Depreciation 2,510 3,162 2,860 3,450 4,034

EBIT 14,957 24,072 17,117 17,268 24,826

EBIT Margin(%) 14.5% 19.9% 15.9% 15.0% 19.1%

Other Income 4,569 3,113 1,200 1,500 2,100

Interest 47 153 50 100 200

PBT 19,478 27,032 18,267 18,668 26,726

PBT Margin(%) 18.9% 22.4% 17.0% 16.2% 20.6%

Tax 5,486 7,759 4,567 4,667 6,681

Adjusted PAT 13,993 19,273 13,700 14,001 20,044

APAT Margins (%) 13.6% 15.9% 12.8% 12.2% 15.4%

Exceptional items 0 0 0 0 0

PAT 13,993 19,273 13,700 14,001 20,044

PAT Margins (%) 13.6% 15.9% 12.8% 12.2% 15.4%

Key RatiosYE Mar FY 18 FY 19 FY 20E FY 21E FY 22E

Per Share Data (Rs)

Adj. EPS 5.8 8.0 5.7 5.8 8.4

CEPS 6.9 9.4 6.9 7.3 10.1

BVPS 32.4 37.7 41.7 45.8 51.6

DPS 3.4 2.3 1.7 1.8 2.5

Growth Ratios(%)

Total revenues 19.9% 17.1% -11.1% 7.2% 12.9%

EBITDA 16.9% 22.5% 18.6% 18.0% 22.2%

EBIT 0.0% 60.9% -28.9% 0.9% 43.8%

PAT -9.6% 37.7% -28.9% 2.2% 43.2%

Valuation Ratios (X)

PE 11.6 8.5 11.9 11.6 8.1

P/CEPS 9.9 7.3 9.8 9.3 6.8

P/BV 2.1 1.8 1.6 1.5 1.3

EV/Sales 1.5 1.3 1.4 1.3 1.2

EV/EBITDA 8.9 5.7 7.7 7.5 5.3

Operating Ratios (Days)

Inventory days 160.9 133.3 140.0 142.0 145.0

Recievable Days 178.6 162.2 185.0 190.0 180.0

Payables day 49.5 43.3 38.0 40.0 45.0

Net Debt/Equity (x) 0.00 0.00 0.00 0.00 0.00

Profitability Ratios (%)

ROCE 18.2% 25.2% 16.3% 15.0% 19.2%

ROE 18.0% 21.4% 13.7% 12.8% 16.2%

Dividend payout ratio (%) 58.5% 28.3% 30.0% 30.0% 30.0%

Dividend yield(%) 5.0 3.4 2.5 2.6 3.7

Cash FlowYE Mar (₹ mn) FY 18 FY 19 FY 20E FY 21E FY 22E

PBT 19,478 27,032 18,267 18,668 26,726

Depreciation 2,510 3,162 2,860 3,450 4,034

Interest 13 122 50 100 200

Chng in working capital (21,929) (7,796) (1,470) (8,131) (8,146)

Tax paid (6,771) (7,669) (4,567) (4,667) (6,681)

Other operating activities (1,186) (762) 0 0 0 Cash flow from operations (a) (7,885) 14,982 15,139 9,420 16,133 Capital expenditure (7,793) (7,379) (9,300) (6,000) (8,300)

Chng in investments 6,781 (2,630) 0 0 0

Other investing activities 1,426 1,148 (100) (100) (100)

Cash flow from investing (b) 414 (8,860) (9,400) (6,100) (8,400)

Free cash flow (a+b) (7,471) 6,122 5,739 3,320 7,733

Inc/dec in borrowings 167 (333) 50 100 50

Dividend paid (incl. tax) (8,192) (5,463) (4,110) (4,200) (6,013)

Interest paid (13) (122) (50) (100) (200)

Other financing activities (3,969) (367) 0 0 0

Cash flow from financing (c) (12,006) (6,285) (4,110) (4,200) (6,163)

Net chng in cash (a+b+c) (19,477) (163) 1,629 (880) 1,569

Closing cash & cash equiv. 7,382 7,219 8,849 7,968 9,538

LKP Securities Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai-400 021. Tel -91-22 - 66351234. Email: [email protected], web: www.lkpsec.com


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