3QFY2016 Result Update | Capital Goods
January 30, 2016
Bharat Electronics (BEL)
BUY
CMP
`1,254
Performance Highlights
Target Price
`1,414
Quarterly highlights - Standalone
Investment Period
12 Months
Y/E March (` cr)
3QFY16 3QFY15 2QFY16
% chg (yoy)
% chg (qoq)
Net sales
1,500
1,582
1,449
(5.1)
3.5
Stock Info
EBITDA
276
252
157
9.6
75.6
Sector
Capital Goods
PAT
296
272
207
8.8
43.0
Market Cap (` cr)
29,546
Source: Company, Angel Research;
Net debt (` cr)
(6,013)
Bharat Electronics Ltd. (BEL) reported mixed set of numbers. BEL reported 5.1%
Beta
1.1
yoy decline in its top-line to Rs1,500cr, which is below our estimate of Rs1,713cr.
52 Week High / Low
1,417/974
Surprise from results has been on EBITDA margin front. Against our expectation
Avg. Daily Volume
320,143
of 16.3%, BEL reported impressive 18.4% margins, mainly led by inventory gains.
Face Value (`)
10
In-line with EBITDA margin expansion, BEL reported PAT margin expansion to
BSE Sensex
24,871
19.7%. PAT was at Rs296cr, ahead of our estimate of Rs288cr.
Nifty
7,564
Reuters Code
BAJE.BO
BEL in 3QFY2016 reported `12,776cr of order inflows, which includes `8,000cr
Bloomberg Code
[email protected]
IACCS (Integrated Air Command Control Systems) order win. Some of the other
order wins include: Weapon Locating Radar order, USHUS-II order, Sub-systems
for T-90 and Shakti EW Systems order. In 9MFY2016, BEL has reported
Shareholding Pattern (%)
`15,297cr of order inflows. Post recent order win, order book as of 3QFY2016-
Promoters
75.0
end stood at `32,333cr. Order book/ Last twelve month (LTM) sales ratio at
MF / Banks / Indian Fls
14.7
3QFY2016-end stood at 4.8x.
FII / NRIs / OCBs
4.1
Valuation: During the quarter, despite some disappointment on revenue front,
Indian Public / Others
6.2
BEL surprised us on the margins front. Another, positive emerging from the
9mFY2016 performance is that BEL has won orders to the tune of `15,927cr.
Abs. (%)
3m 1yr 3yr
Given their strong market positioning, we expect BEL to continue reporting order
Sensex
(6.7)
(14.8)
24.3
wins, going forward.
BEL
(0.9)
10.8
190.6
On the back of increase in order inflows, we are optimistic that the company
should see increased traction in the sales and earnings growth, going forward.
Since our initiation report, BEL stock has touched our then recommended price
3-Year Daily Price Chart
target of `1,414 and has corrected. With recent correction in the stock price,
1600
1400
BEL’s valuation has got attractive. Accordingly, we recommend BUY on the stock
1200
with price target of `1,414.
1000
800
Key Financials (Consolidated)
600
Y/E March (` cr)
FY13
FY14
FY15
FY16E
FY17E
FY18E
400
Net Sales
6,273
6,518
7,093
7,737
8,634
10,064
200
% chg
6.1
3.9
8.8
9.1
11.6
16.6
0
Net Profit
906
951
1,197
1,296
1,475
1,760
% chg
7.0
5.0
25.8
8.2
13.9
19.3
EBITDA (%)
10.6
14.1
16.6
16.8
17.2
17.6
Source: Company, Angel Research
EPS (`)
38
40
50
54
61
73
P/E (x)
32.4
31.1
24.7
22.8
20.0
16.8
P/BV (x)
4.6
4.1
3.6
3.2
2.9
2.5
Adj. RoE (%)
30.3
20.1
36.8
39.3
45.6
51.8
RoCE (%)
26.6
23.9
30.7
28.5
29.0
30.5
Yellapu Santosh
EV/Sales (x)
3.9
3.9
3.4
3.0
2.6
2.1
022 - 3935 7800 Ext: 6811
EV/EBITDA (x)
36.5
27.1
20.0
17.5
14.6
11.6
[email protected]
Source: Company, Angel Research; CMP as of January 29, 2016
Please refer to important disclosures at the end of this report
1
BEL | 3QFY2016 Result Update
Exhibit 1: Quarterly Performance (Standalone)
Particulars (` cr)
3QFY16
2QFY16
% chg (qoq)
3QFY15
% chg (yoy)
9mFY16
9mFY15
% chg
Net Sales
1,500
1,449
3.5
1,582
(5.1)
4,019
3,844
4.5
Total Expenditure
1,225
1,292
(5.2)
1,330
(7.9)
3,618
3,563
1.5
Cost of materials consumed
696
776
(10.3)
778
(10.5)
2,095
1,986
5.5
Purchases of stock-in-trade
65
65
(0.1)
108
(40.3)
198
289
(31.7)
Employee benefits Expense
308
329
(6.4)
302
2.1
949
897
5.8
Other Expenses
156
122
27.2
142
9.7
377
391
(3.8)
EBITDA
276
157
75.6
252
9.6
401
281
42.6
EBIDTA %
18.4
10.8
15.9
10.0
7.3
Depreciation
41
40
2.8
37
10.7
122
111
9.7
EBIT
234
117
100.9
214
9.3
279
170
64.2
Interest and Financial Charges
0
0
0
0
0
Other Income
152
156
(2.3)
140
8.7
460
410
12.3
PBT before Exceptional Items
386
272
41.9
354
9.1
739
579
27.5
Exceptional Items
0
0
0
0
0
PBT after Exceptional Items
386
272
41.9
354
9.1
739
579
27.5
Tax
91
66
38.4
82
10.1
175
135
30.0
% of PBT
23.5
24.1
(2.5)
23.3
1.0
23.7
23.3
2.0
PAT
296
207
43.0
272
8.8
563.2
444.4
26.7
PAT %
19.7
14.3
17.2
14.0
11.6
Dil. EPS
12.32
8.61
43.1
11.33
8.7
23.47
18.52
26.7
Source: Company, Angel Research; Note: nmf- Not meaningful
Revenues report 5.1% yoy decline
BEL reported 5.1% yoy decline in sales to `1,500cr in 3QFY2016, which is below
our expectation of `1,713cr. Revenue during the quarter reflects revenue booking
from Akash Missile Systems, Fire Control System and 3D Tactical Control radar
orders.
Exhibit 2: Projects contributing to 3QFY2016 revenues
Akash Missile System (Airforce, Army)
Fire Control System
3D Tactical Control Radar
Low level light weight radar
Gigabit Ethernet based ship data network
L band radar for exports
Source: Company, Angel Research
EBITDA margin expansion surprises us..
BEL surprised us on the EBITDA margins front, as it reported 246bps yoy EBITDA
margin expansion in 3QFY2016 to 18.4%. EBITDA losses narrowed down from a
year ago level of `31cr. 10.5% reduction in the raw material expenses contributed
to EBITDA margin expansion.
January 30, 2016
2
BEL | 3QFY2016 Result Update
PAT margins expand to 19.7%
In-line with EBITDA margin expansion, PAT margin’s also expanded. PAT margins
of the company expanded from 17.2% year ago to 19.7% in 3QFY2016.
Reports `12,776cr of Order Inflows for 3QFY2016
BEL in 3QFY2016 reported `12,776cr of order inflows, which includes the
`8,000cr IACCS (Integrated Air Command Control Systems) of order win. Some of
the major order wins include: Weapon Locating Radar order, USHUS-II order, Sub-
systems for T-90 and Shakti EW Systems order.
In 9MFY2016, BEL has reported `15,297cr of order inflows (vs our FY2016E
expectation of `10,000cr). We now revise upwards our Order Inflow assumption to
`12,000cr, but given that it takes more than 3-4 quarters for order inflows to
translate to revenues, we are currently maintaining our FY2017E and FY2018E
revenue estimates.
Post the recent order wins, the order book as of 3QFY2016-end stood at
`32,333cr. Order book/ Last twelve month (LTM) sales ratio at 3QFY2016-end
stood at 4.8x. Current order book gives revenue visibility for the next two years.
Valuation
During the quarter, despite some disappointment on revenue front, BEL surprised
us on margins front. Another positive emerging is that BEL has reported strong
9mFY2016 order inflows of `15,927cr. Given their strong market positioning, we
expect BEL to continue reporting order wins, going forward.
On the back of increase in order inflows, we are optimistic that the company
should see increased traction in the sales and earnings growth, going forward.
Since our initiation report, BEL stock has touched our then recommended price
target of `1,414 and has corrected. With recent correction in the stock price, BEL’s
valuation has got attractive. Accordingly, we recommend BUY on the stock with
price target of `1,414.
Company background
Bharat Electronics Ltd. (BEL) is Bangalore based public sector undertaking (PSU)
established in 1954 under the control of Ministry of Defence (MoD) to cater to
specialised electronic needs of the Indian Defense. BEL, a Nava-Ratna company
over the years has grown to be multi-segment, multi-technology company servicing
a diverse range of clients across India and in the international markets.
Business Segments
BEL operates across 8 business segments, with ~20-30% of their current Order
Book contribution coming-in from their largest business segment- Radars, Sonars
& Weapons Systems.
January 30, 2016
3
BEL | 3QFY2016 Result Update
Exhibit 3: Business Segments
Radars, Sonars & Weapon Systems
Communication
Electronic Warfare
Network Centric Systems
Anti Submarine Warfare
Electro-Optics
Tank Electronics
Civilian Products (such as EVM machines
Source: Company, Angel Research
Details of Manufacturing Plants
To-date BEL has set-up 9 manufacturing plants across Bangalore (headquarters),
Chennai, Machilipatnam (post take-over of Andhra Scientific Company in 1983),
Hyderabad, Pune, Navi Mumbai, Panchkula, Kotdwara, and Ghaziabad, which
are into manufacture of entire range of Defense products offered by the company.
Exhibit 4: Details of Manufacturing facilities
Production Facilities
Production details
(since)
Military Communication Equipment, Network Centric Systems,
Military Radars, Naval Systems, Electronic Warfare (Air-force),
Avionics, Weapon Management System, Telecom and
Bangalore (1966)
Broadcast System, Components, Coastal Surveillance System,
Electronic Voting Machines, Solar Products, Traffic Signals,
Security Systems, Microwave Super Components
Tank Electronics, Gun Upgrades, Multi-purpose Advanced
Chennai
Stabilized systems
Machilipatnam (1983) Electro-Optics (Night Vision Devices)
Hyderabad
Electronic Warfare Systems
Pune (1981)
X-ray Tubes, Batteries, Laser Products
Navi Mumbai
Shelters, Masks
Panchkula
Military Communication Equipment, Encryption Products
Kotdwara
Telecommunication Systems, Military Communication Systems
Network Centric Systems, Radars, Satcom (Defense),
Ghaziabad
Microwave components
Source: Company AR’s, Angel Research
January 30, 2016
4
BEL | 3QFY2016 Result Update
Investment Arguments
Bharat Electronics (BEL) is a PSU and a leader in the domestic defense electronics
space, with major proportion of its revenue coming in from the Indian Navy and Army.
Defense spending at an inflexion point: After years of lull, government announced
15.4% yoy increase in Defense Capital Budget to `94,588cr. In our view, we are at
an inflexion point where Indian Defense capex cycle, led by government spending
is entering new era of growth. Our view strengthens on account of following
developments, (1) Defense sector getting high priority in government’s ‘Make in
India’ campaign, with increased emphasis on the indigenization aspect,
(2)
increase in FDI limits in defense from 26% to 49%, and (3) $47bn worth of projects
cleared by Defense Acquisition Council (DAC) in last 19 months, indicating faster
clearances in place. Also high expectations are being built from soon to be
released Defense Procurement Procedures (DPP). Current bid pipeline, which could
lead to strong award activity for next few years, along with above-mentioned
factors indicate that good times are ahead for Defense sector.
BEL to emerge as key beneficiary: At the backdrop of higher allocation made
towards defense capex with ~$47bn worth of projects cleared by DAC, we expect
good times ahead for defense players, including BEL. BEL in FY2015 had market
share of 37% in domestic defense electronics. On considering (1) bid-pipeline
dominated by Indian Airforce and Navy’s platform projects, which have high
Defense Electronics components requirement, (2) BEL’s in-house R&D capabilities,
(3) tie-up with Thales, France for product development, and (4) zero debt status with
potential for further improvement in working capital cycle, all point out that BEL should
maintain its strong market positioning in Defense Electronics space. On a whole, we
expect BEL to emerge as key beneficiary of the revival in Defense capex cycle.
Risks & Concerns
To increase indigenization in the defense sector, Government of India (GoI)
increased the FDI limit in Defense sector to 49% in Jul-2014. Till now, recent
developments/ announcements have failed to attract any major international
defense players in to India. With more positive announcements expected and
fast growing bid pipeline, international defense giants could be compelled to
forge partnership with domestic players at the time of bidding. This could
possibly lead to loss of market share for BEL, which we have not incorporated
in to our assumptions.
Last few years have seen sluggish ordering activity from the Defense sector.
Even though Defense sector in the last few months has seen positive
announcements, any further delays in the awarding activity, could act as risk
to our estimates.
Defense is a highly technology focused sector. BEL would have to continuously
spend on R&D to regularly upgrade its product profile. Any shift away from the
R&D could make their products unattractive (vs the peers), resulting in loss of
market share and further delaying the execution.
Any government announcement to de-list the products manufactured by BEL
could open up the competition and further impact their market positioning
within the domestic markets, which again acts as a risk to our market share
assumptions and threatens our earnings growth estimates.
January 30, 2016
5
BEL | 3QFY2016 Result Update
Profit & Loss Statement (Consolidated)
FY13
FY14
FY15
FY16E
FY17E
FY18E
Net Sales
6,273
6,518
7,093
7,737
8,634
10,064
% Chg
6.1
3.9
8.8
9.1
11.6
16.6
Total Expenditure
5,610
5,596
5,918
6,440
7,153
8,289
Raw Materials Consumed
3,156
3,344
3,495
3,870
4,384
5,141
Purchase of stock-in-trade
760
444
440
467
515
580
Employee benefits Expense
1,125
1,046
1,281
1,343
1,406
1,564
Other Expenses
569
762
702
760
847
1,004
EBITDA
663
922
1,175
1,297
1,481
1,775
% Chg
4.3
39.1
27.4
10.4
14.2
19.8
EBIDTA %
10.6
14.1
16.6
16.8
17.2
17.6
Depreciation
136
150
166
193
216
239
EBIT
526
772
1,008
1,104
1,265
1,537
% Chg
3.2
46.6
30.6
9.4
14.6
21.4
Interest and Financial
1
4
3
3
3
3
Charges
Other Income
625
437
507
544
611
709
EBT before Excep & prior-
1,151
1,205
1,513
1,645
1,874
2,242
period items
Exceptional Items & Prior
(9)
1
1
0
0
0
period Items
EBT
1,142
1,206
1,513
1,645
1,874
2,242
Tax Expenses
236
254
316
349
398
482
% of PBT
20.7
21.1
20.9
21.2
21.2
21.5
PAT before Minority Interest
906
952
1,197
1,296
1,476
1,760
Minority Interest
0
0
(0)
0
0
1
PAT
906
951
1,197
1,296
1,475
1,760
% Chg
7.0
5.0
25.8
8.2
13.9
19.3
PAT %
14.4
14.6
16.9
16.7
17.1
17.5
Diluted EPS
38
40
50
54
61
73
% Chg
7.6
4.4
25.8
8.2
13.9
19.3
January 30, 2016
6
BEL | 3QFY2016 Result Update
Balance Sheet (Consolidated)
Y/E March (` cr)
FY13
FY14
FY15
FY16E
FY17E
FY18E
Sources of Funds
Equity Capital
80
80
80
240
240
240
Reserves & Surplus
6,407
7,140
8,037
8,852
9,975
11,348
Networth
6,487
7,220
8,117
9,092
10,215
11,588
Total Debt
0
0
25
0
0
0
Minority Interest & Govt. Grants
163
224
207
203
202
202
Other Long-term Liabilities
386
365
435
441
476
483
& Prov.
Total Liabilities
7,037
7,809
8,784
9,736
10,893
12,273
Application of Funds
Gross Block
2,106
2,366
2,894
3,276
3,681
4,104
Accumulated Depreciation
1,506
1,671
1,821
2,014
2,230
2,469
Net Block
600
695
1,073
1,262
1,451
1,635
Capital WIP & Intan. Assets
328
458
140
110
105
100
under Develop.
Investments
0
0
0
0
0
0
Current Assets
Inventories
3,255
3,340
3,424
3,664
3,864
4,244
Sundry Debtors
3,364
4,156
3,805
4,146
4,707
5,476
Cash and Bank Balance
5,331
4,605
6,038
6,901
7,938
9,042
Loans & Advances
1,378
1,190
684
750
800
780
Other Current Asset
81
69
54
55
57
59
Current Liabilities
7,814
7,166
6,941
7,663
8,547
9,589
Net Current Assets
5,594
6,192
7,064
7,852
8,818
10,012
Other Assets
515
464
506
512
520
525
Total Assets
7,037
7,809
8,784
9,736
10,893
12,273
January 30, 2016
7
BEL | 3QFY2016 Result Update
Cash Flow Statement (Consolidated)
Y/E March (` cr)
FY13
FY14 FY15 FY16E FY17E FY18E
Profit before tax
1,147
1,206
1,513
1,645
1,874
2,242
Dep. & Other Non-cash
(338)
(336)
(163)
(266)
(218)
(225)
Charges
Change in Working Capital
(2,104)
(1,237)
436
75
71
(90)
Interest & Financial Charges
1
4
3
3
3
3
Direct taxes paid
(245)
(206)
(356)
(349)
(398)
(482)
Cash Flow from Operations
(1,540)
(569)
1,434
1,108
1,332
1,448
(Inc)/ Dec in Fixed Assets
(353)
(369)
(225)
(351)
(400)
(418)
(Inc)/ Dec in Invest. &
2,106
1,128
(614)
302
238
142
Oth. Adj.
Cash Flow from Investing
1,753
759
(839)
(49)
(162)
(277)
Issue/ (Buy Back) of Equity
0
0
0
0
0
0
Inc./ (Dec.) in Borrowings
0
(0)
25
(25)
0
0
Dividend Paid (Incl. Tax)
(157)
(209)
(220)
(301)
(331)
(364)
Interest Expenses & Oth. Adj.
(1)
(4)
(14)
(3)
(3)
(3)
Cash Flow from Financing
(157)
(213)
(209)
(329)
(334)
(367)
Inc./(Dec.) in Cash
56
(23)
386
730
837
804
Opening Cash balances
1,752
1,809
1,786
2,171
2,901
3,738
Closing Cash balances
1,809
1,786
2,171
2,901
3,738
4,542
January 30, 2016
8
BEL | 3QFY2016 Result Update
Key Ratios (x)
Y/E March
FY13
FY14
FY15
FY16E FY17E FY18E
Valuation Ratio (x)
Adj. P/E (on FDEPS)
32.4
31.1
24.7
22.8
20.0
16.8
Adj. P/E (on FDEPS)
28.2
26.8
21.7
19.8
17.5
14.8
Dividend yield (%)
1.7
1.6
1.3
1.1
1.0
1.0
EV/Sales
3.9
3.9
3.4
3.0
2.6
2.1
EV/EBITDA
36.5
27.1
20.0
17.5
14.6
11.6
EV / Total Assets
3.4
3.2
2.7
2.3
2.0
1.7
Per Share Data (`)
Adj. EPS (fully diluted)
38
40
50
54
61
73
Cash EPS
44
46
57
62
70
83
DPS
7.4
7.8
9.7
10.7
11.8
13.0
Book Value
270
301
338
379
426
483
Returns (%)
RoCE (Pre-tax)
26.6
23.9
30.7
28.5
29.0
30.5
Angel RoIC (Pre-tax)
35.8
35.0
36.4
41.4
45.4
51.4
Adj. RoE
30.3
20.1
36.8
39.3
45.6
51.8
Turnover ratios (x)
Asset Turnover (Gross Block) (x)
2.9
2.8
2.6
2.4
2.4
2.5
Inventory / Sales (days)
178
190
179
172
163
150
Receivables (days)
180
217
211
193
192
189
Payables (days)
541
489
435
414
414
399
WC (days)
(183)
(82)
(45)
(50)
(59)
(61)
Leverage Ratios (x)
D/E ratio (x)
0.0
0.0
0.0
0.0
0.0
0.0
January 30, 2016
9
BEL | 3QFY2016 Result Update
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way
responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot
testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.
While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be
regulatory, compliance, or other reasons that prevent us from doing so.
This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,
redistributed or passed on, directly or indirectly.
Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from
or in connection with the use of this information.
Note: Please refer to the important ‘Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the
latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may
have investment positions in the stocks recommended in this report.
Disclosure of Interest Statement
BEL
1. Analyst ownership of the stock
No
2. Angel and its Group companies ownership of the stock
No
3. Angel and its Group companies' Directors ownership of the stock
No
4. Broking relationship with company covered
No
Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors
Ratings (Based on expected returns
Buy (> 15%)
Accumulate (5% to 15%)
Neutral (-5 to 5%)
over 12 months investment period):
Reduce (-5% to -15%)
Sell (< -15%)
January 30, 2016
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