Buy Bharat Electronics; target of Rs 4020: Sharekhan

Sharekhan 's report on Bharat Electronics 

“Bharat Electronics Ltd (BEL), the flag bearer of India’s defence play and “Make in India” initiative, has recently corrected by close to 22% from its high of close to Rs4,000. The underperformance could be attributed to a lower than expected increase in the defence allocation in the Union Budget for FY2016 (a 10% increase YoY), lower order accretion by the company (down 10% YoY to Rs22,500 crore) and strong re-rating in the stock price in the last one year (BEL touched a peak multiple of 22x one-year forward earnings in February 2015, gaining around 200% in one year). Nevertheless, we view the correction in the stock as a short-term aberration and opportunity to buy the stock with an investment perspective for the next 12 months.”

“Recently, the consortium of BEL and Rolta India (Rolta) has been selected as the development agency for a Battlefield Management System (BMS) project by the defence ministry. The order is valued at Rs50,000 crore (around 70% of the work is for the BEL-Rolta consortium) and the rest is for the Larsen and Toubro-Tata Power consortium to be implemented over the next five to seven years. The awarding of the project was a breakthrough for the Indian defence sector, as the project had been stuck for five years since 2009 and it’s the first project to be awarded under the “Make in India” programme under the Defence Procurement Procedure (DPP) route. Thus, we believe the move to indigenise India’s defence procurement is moving in the right direction and will gain momentum in the coming years when we will see many more projects being awarded.”

“We continue to prefer BEL as a pure proxy play for the fast growing defence sector and more on the “Make in India” theme. Though concerns regarding a lower order book accretion over FY2016 and softness in the earnings trajectory could be there, we expect BEL to deliver strong earnings in Q4FY2015, which is seasonally a strong quarter for the company. We see BEL as a long-term growth-cum-value play on the defence sector and advise investors to use the recent weakness to build position in the stock. At the current market price of Rs 3,105 the stock trades at 15.5x FY2017E earnings. That is a 30% discount to its peak valuation of 22x. We reiterate our Buy rating on the stock with an unchanged price target of Rs4,020 (20x FY2017E)”, says Sharekhan’s research report.

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