Buy Bharat Electronics; target Rs 1433: P Lilladher

"Bharat Electronics, top-line came in at Rs 14.4bn, up 1% YoY (PLe: Rs 16bn); we believe the lower top-line might be on account of a delay in delivery of few large projects. Execution has been delayed due to issues like delay in procurement of bulk-production clearance in few cases and extended acceptances timeline from customers. EBITDA margin improved by 170bps YoY and company posted positive EBITDA after two quarters of continuous losses. RM cost % sales remained stable at ~65%, both YoY and QoQ. However, reduced employed cost YoY and QoQ helped improve margins. We believe improved product mix and deliveries should help improve both sales and margin in the next quarter. Reported PAT was up 13% YoY to Rs 1.97 bn.

Order book at the end of Q3FY13 is ~Rs 23.5bn (4.2xFY12 sales) which provides strong visibility, while the same in 9MFY13 is ~Rs 26bn. We believe that the order inflow in Q4FY13 could be close to Rs 35bn as rush for order finalization has happened in the last quarter (a mix of product and spare orders). We expect the company to end the year with order inflow of Rs 61bn (BEL expectation: Rs 80-100bn).

The stock is trading at 10xFY14E earnings. We expect the stock to deliver 11% CAGR in earnings and 10% CAGR in order flow over FY12-15E. While the opportunity for BEL is large, given the increase in defence spend, both for capital equipments and modernization, we expect volatility in annual earnings (due to change in product mix) and order flow to impact sales. We believe BEL offers good investment opportunity to the investor who wants to invest in the Indian defence sector with a long-term view. Buy the stock with a target price of Rs 1,433," says Prabhudas Lilladher research report.

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