Hold Bharat Electronics; target of Rs 194: ICICI Direct

ICICI Direct's research report on Bharat Electronics

The company reported a strong operating income of Rs 1724.8 crore, up 97.9% YoY (our estimate: Rs 1084.8 crore for the quarter). However, total income grew 77.9% YoY due to 47.8% YoY drop in other income The company reported EBITDA profit of Rs 163.3 crore vs. loss of Rs 46.7 crore in Q1FY17. We estimate EBITDA of Rs 55.7 crore for the quarter. EBITDA margins came in at 9.5% vs. our estimate of 5.1% crore for the quarter. Higher EBITDA margins were on account of strong order booking during the quarter. Employee expenses also witnessed an increase of 46.1% YoY to Rs 462 crore for the quarter PAT came in at Rs 125.3 crore, up 247% YoY. We estimate PAT growth of 144% YoY (Rs 88.1 crore) for the quarter.

Outlook

Going forward, BEL is likely to execute large orders like IACCS, VVPAT and Akash. We believe these orders will be margin dilutive for the company as some these are integration projects where the margin profile is the range of 5-15%. Accordingly, we pencil in EBITDA margins of 18.1% and 17.7% in FY18E & FY19E, respectively (down from 20.5% in FY17). Thus, we expect BEL to deliver PAT CAGR 5.8% over FY17-19E (despite sales CAGR of 17.3% during the same period). Accordingly, we value the company at 25x P/E on FY19E EPS of Rs 7.8 to arrive at a target price of Rs 194 per share. We have a HOLD recommendation on the stock.