Buy Bharat Electronics; target of Rs 2600: Motilal Oswal

Motilal Oswal`s research report on Bharat Electronics“Bharat Electronics, Large ticket acquisitions of USD20b-22b to be finalized by the Indian Air Force –(1) MMCRA of ~USD20b from Dassault (with 50% offset), and (2) Chinook/Apache Helicopters of ~USD2.5b from Boeing – would be the key near-term drivers for Defense Electronics. Given that the proportion of Electronics is higher in Air Force orders, the finalization of these deals would be important from the perspective of Bharat Electronics (BHE). Large Electronic Warfare Systems such as Tactical Communication Systems (TCS), Battle Field Management Systems (BFMS), and Future Infantry Soldier System (FISS), among others, would be medium-term drivers. In the past, BHE has stated that the potential pipeline from TCS/BFMS stands at INR400b-500b.” “We expect BHE to report 14% revenue CAGR over FY15-17, largely supported by execution of the Akash Missile project. During FY11/12, BHE received orders of ~INR65b for Akash Missiles, and execution has been delayed. Improved execution will support EBITDA margin (expect 210bp expansion during FY14-17), aided by lower staff cost (expect 200bp decline), and lower provisions (expect 180bp decline), offsetting the expected 165bp reduction in gross margin during this period. Net working capital (NWC) is likely to deteriorate – being the lead integrator, BHE had received advances on the Akash Missile project in FY11/FY12, leading to a surge in cash balance and negative reported NWC.” “We expect BHE to report EPS of INR121 in FY15 (up 3%), INR144 in FY16 (up 19%), and INR168 in FY17 (up 17%). We initiate coverage with a Buy rating; our target price is INR2,600 (18x FY16E EPS),” says Motilal Oswal research report. 

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