Buy Bharat Electronics; target of Rs 1550: Edelweiss

Edelweiss research report on Bharat ElectronicsBharat Electronics (BEL) missed Q1FY17 P/L consensus estimates led by revenue slippage (INR2.5‐3.0bn) in a seasonally weak quarter. This led to a miss at PAT and EBIDTA levels despite favourable revenue mix triggering sharp gross margin expansion. Orders at INR10bn (up 85% YoY) grew on a low base, implying INR321bn (up 53% YoY, down 8% QoQ) order book. While defence capex is not likely to grow materially over the next 12‐24 months, we believe BEL’s positioning is far superior to most domestic defence PSUs riding a robust INR 300‐350 Bn projects award pipeline. Buyback of 7% equity implies 300bps RoE expansion to 19%. Maintain ‘BUY’ with TP of INR 1,550.

We remain positive on BEL’s improving revenue visibility given the strong order book and its favourable positioning in the medium‐term pipeline of more than INR 300‐350bn worth of projects (INR 150‐180bn plus due to be awarded over 12‐15 months). Also, the company is focusing on integration capability (new R&D centre at Bengaluru) which will further sharpen its edge versus peers. However, we believe earnings growth will pick up only beyond FY18 once most large projects start boosting revenue growth. We maintain ‘BUY/SO’. The stock is currently trading at 20x and 17.8x FY17E and FY18E EPS respectively.