Bharat Dynamics: FY23 road a bit bumpy, but prospects bright for FY24

Bharat Dynamics | CMP: Rs 913.20 | THe share price jumped over 4 percent after the firm inked an export order worth $255 million. This new order is an addition to Bharat Dynamics' heavy order book, with deals totalling Rs 11,906 crore as of November-end. While order inflows were slower than expected in the first nine months of the current financial year, brokerage firm ICICI Securities remains bullish about the company's future prospects.

With indigenisation being the talk of the town and wealth managers dashing to add the right defence stocks in their portfolios, the defence pack had rallied on the back of a rosy outlook. Despite this, there are some who believe Bharat Dynamics will face a hiccup on the order inflow and supply side fronts, which could hamper FY23 earnings, but FY24 numbers may still strike a high note.

Recently, the company had announced signing 10 agreements with foreign and Indian companies while showcasing its largest-ever display of products at the Aero India 2023 event in Bengaluru, which prompted investors to lap up the stock. The stock had rallied 16 percent on February 16.

In the past six months, shares of Bharat Dynamics have seen bouts of profit-taking and is now up only 13 percent.

About the company

Bharat Dynamics is a defence public sector undertaking (PSU) in India engaged in the manufacture of surface-to-air missiles (SAMs), anti-tank guided missiles (ATGMs), air-to-air missiles (AAMs), underwater weapons, launchers, countermeasures and test equipment.

During FY22, the company reported a revenue of Rs 2,817 crore, up 47 percent year-on-year (YoY), while earnings before interest, taxes, depreciation and amortisation (EBITDA) and profit after tax (PAT) jumped 111 percent and 94 percent YoY to Rs 726 crore and Rs 500 crore, respectively.

Read more | Russia-Ukraine war will aid the rise of defence stocks

In the December quarter, revenue tanked 43 percent YoY to Rs 461.6 crore due to weak execution, while a significant rise in other costs resulted in the operating margin contracting by 1,674 basis points (bps) YoY to 19.3 percent. EBITDA in the quarter declined 69 percent to Rs 88.9 crore and net profit fell 61 percent to Rs 83.7 crore.

Weak order inflow in FY23, but FY24 to be much better

So far in 2023, the company’s order inflows stood at Rs 5,150 crore, including Astra Mk-1 (air-to-air missile) at Rs 2,970 crore and export orders worth $255 million (Rs 2,200 crore).

“The management had earlier indicated Rs 10,000 crore inflows in FY23, but this may be significantly lower due to delay in awarding (orders for) Akash missile system,” warned Elara Securities. However, the brokerage firm sounds optimistic when it comes to order inflow in FY24.

In FY24, Bharat Dynamics could expect orders worth Rs 10,000-12,000 crore for: Akash surface-to-air-missile (order size Rs 6,000-7,000 crore), medium range surface-to-air-missile, Nag (anti-tank guided missile), and Helina (air-to-surface missile), the brokerage firm highlighted.

The order book, as of March 1, 2023, stood at Rs 13,700 crore, with book-to-bill ratio of 4.6 times its FY23 sales, according to Elara Securities. Book-to-bill ratio is the ratio of orders received to units shipped and billed for a specified period; a ratio above one implies more orders were received than filled, indicating strong demand, while a ratio below one implies weak demand.

Multiple analysts believe that strong order book provides enough headroom for growth.

Electronics supply issues

Revenue growth may come under pressure because of the electronics supply issue, some said.

Although the management expects 10-12 percent revenue growth in FY23, implying a topline of Rs 3,100-3,200 crore in FY23, Elara Securities sees flat revenue at Rs 2,850 crore in FY23, owing to persistent supply chain issues in certain electronics. And in FY24, the management expects Rs 3,800-4,000 crore revenue, given the strong order book, along with a margin at 22-23 percent.

Read more | Private defence stocks over public ones? Here’s what the market thinks

Elara Securities has pared its EPS for FY23 by 5 percent owing to supply chain issues, but has retained its FY24 estimates. It has also retained its target price at Rs 1,150 based on 23 times December FY24 price to earnings (PE) led by strong inflow trajectory of Rs 6,000-8,000 crore, robust order book at Rs 13,900 crore and rising visibility in the exports business.

However, the brokerage firm cautioned that the key monitorable is a large value order of a quick-range SAM (QRSAM), which may be delayed to 2024.

Exports to act as a trigger for revenue growth

Bharat Dynamics bagged an export order worth $255 million (around Rs 2,200 crore) in February 2023, thereby proving its capability as India’s sole missile maker in a competitive global market, said Elara Securities.

As of date, the defence PSU has received leads from 21 countries for various products and the company is focusing on converting them into orders. Moreover, there are some products for potential export orders such as Akash SAM, Astra AAM, light-weight torpedo, Konkurs-M ATGM, smart anti-airfield weapon (SAAW) and counter measure dispensing system (CMDS), it highlighted.

Even ICICI Securities is of the view that the company has a huge opportunity in exports, which could be a key trigger for an upward momentum in the stock. There is scope for export orders for products, such as Akash SAM, ATGMs, Astra, and torpedoes due to rising interest from friendly countries and lower cost on high indigenisation levels, it said.

Despite a slower-than-expected order inflow in the first nine months of FY23, ICICI Securities believes Bharat Dynamics will benefit from a number of opportunities in the pipeline.

Read more | Weekly Tactical Pick: This defence stock is high on firepower, loaded with value

The company’s December quarter EBITDA tanked 69 percent YoY to Rs 88.9 crore, primarily because of slower-than-expected order accretion.

What to do with the stock?

In a month, the stock is up 10 percent and in the past three years, the scrip has risen closer to 300 percent.

Elara Securities believes that a meaningful correction in the company’s stock price may provide a good entry point in the long term. “This is because we remain optimistic on the defence indigenisation story, supported by the unexplored exports market in the missiles segment.”

After marking a high at Rs 1,026 in October 2022, Bharat Dynamics is under a range-bound corrective move, said Milan Vaishnav, founder and technical analyst, Gemstone Equity Research and ChatWizard FZE.

“The stock has traded between Rs 800-1,026 levels while bouncing off its 200-DMA which is at Rs 866.95. The stock continues to remain in this trading range. Presently, there are no triggers to go long on the stock,” he added.

Vaishnav believes one could enter the stock when it is trading above Rs 990. He sees some upward momentum in the stock when the stock surpasses this level.

Meanwhile, Elara Securities has retained its ‘buy’ recommendation as it sees an earnings growth of 25 percent compounded annually in FY22-25 and Return on Equity (RoE) and Return on Capital Employed (ROCE) of 20 percent and 15 percent respectively, in FY23-25.