Bharat Electronics Limited Stock Analysis
From the author: Bharat Electronics Limited (“BEL” or the “Company”) is a Government of India undertaking engaged in the manufacture and supply of strategic electronic products primarily the defense services. The Company operates under the Ministry of Defense and engaged in the designing and developing of specialized weapons and advanced electronic products not only for Indian armed forces but also products like surveillance systems, X-ray baggage inspection systems, home and street lighting systems, traffic management systems for civil users. For a financial report on the company and business verticals – Bharat Electronics financial statements.
Disclaimer: The stock analysis presented below should not be taken as a buy/sell recommendation. The circumstances of the company and the economic environment may have changed since the date of this stock analysis.
What’s driving the Stock
Fundamentally sound and continuously profit making
The Company’s net revenue from operations over the 5 year period (i.e. 2008-09 to 2012-13) grew at an impressive CAGR of 17.88 %. For FY 2013, income from operations has increased by 6.05 % to Rs. 6,273.02 Cr. from Rs. 5,915.25 Cr. and Net Profit has increased by 7.49 % to Rs. 910.78 Cr. from Rs. 847.33 Cr. BEL has reserves in excess of Rs. 5,821.95 Cr and operates with negligible debt on its books. In addition, the company is sitting on a robust order book of Rs. 24,502 Cr. as on 1st January 2014 which is ~ 5 times its annual revenue. We believe that this should translate into strong revenue visibility over the next 2-3 years.
We believe that the opportunity for BEL is huge. Post the General Election of 2014, we believe that there will be a push in defense spending.
|Defensive bet in the capital goods sector|
|Debt-free balance sheet|
|High cash reserves|
|Sound order book|
|Generous dividend policy|
Increasing defense budget allocation
In the Union Budget 2013-14, there was an increase of 5.3 % in the defense allocation to Rs. 2,03,672.10 Cr. (US$ 37.4 billion). There has been an increase in percentage share of the capital expenditure from 41.15 % (2012 - 13) to 42.59 % (2013 - 14) in the defense budget. This increase in capital expenditure would lead to higher acquisition of weapon systems and equipment by the armed forces. BEL being one of the major providers of defense equipment is likely to benefit from this increased allocation. In FY 2013, defense supply contributed 85 % to the total turnover of the Company as against 73% in FY 2012.
Among the three defense services capital expenditure on Air Force equipment has increased more compared to other services. BEL supplies various air and ground control equipment to the Indian Air Force and will benefit from this increase
Dominant supplier of defense electronics
Bharat Electronics is a market leader in defense electronics in India with ~60% market share. The Company manufactures products with applications in communication, radar, naval systems, electronic warfare systems, weapon systems and tank electronics in addition to electronic voting machines, TV set-top boxes and solar cells and lighting systems.
The customer profile of BEL can be classified into defense and non-defense customers.
Growing Defense and Security needs
Given the cross border tension on India’s north eastern and western borders the country’s capital expenditure on defense is likely to grow over the next few years. Further, increasing crimes have increased the demand for security systems in the non-defense segment. Historical evidence suggests that the rate of crime increases with an increase in population.
Sensing growth opportunity in the non-defense segment, the Company is taking steps to expand its business in the field of homeland security, smart cards and telecom. The Company has developed some products like x - ray baggage inspection system, under-carriage vehicle inspection system and video analytic software and is further working to tap the opportunity in this space.
We believe that the non-defense segment which currently contributes ~20 % to the total revenue could become a major growth driver for the Company.
What’s Dragging the Stock
Increasing competition from Indian private industry
The Defense Sector is increasingly being opened up for private sector participation. Government has allowed private sector participation up to 100 % in the defense industry sector with foreign direct investment (FDI) permissible up to 26 %. Earlier, Bharat Electronics was the only vendor chosen by the Government of India to build radars, communication and electronic warfare systems for the Indian military. Now, companies such as the Tata Motors, Rolta India Ltd, Alpha Design Technologies Pvt. Ltd, Data Patterns (India) Pvt. Ltd and Astra Microwave Products Ltd have won orders competing against BEL. The growing competition from private sector players has resulted in margin pressures and has impacted the overall profitability of the Company.
Rapid changes in technology
Defense and security equipment space is constantly evolving and witnessing rapid technological advancements. The Company faces a challenge of keeping pace with the latest technological advancements in its business areas. The technologies required to manufacture various products in the segment in which BEL operates, are being upgraded continuously.
This process of technology up-gradation involves huge capital investment which the Company needs to incur continuously in order to maintain its competitive position in the market which may put pressure on the operating margins of the Company.
Rajat Sharma is the CEO at Sana Securities, an independent equity research and financial advisory firm in India. Views expressed here are of the author and RKSV Securities has not verified any facts stated above.