Strong execution propels Bharat Electronics' Q1 earnings

Analysts raise earnings forecast for defence equipment major, but some also advise caution

With gains of more than 15 per cent in the past six months and 45 per cent in a year, Bharat Electronics (or BEL) has cemented its position as a unique defence sector player. Therefore expectations, too, are high from the company. But, much to the Street’s surprise, June quarter (Q1) results published late on Monday not just outdid expectations by a huge margin, but also set a new benchmark for the company.

Revenues at Rs 1,695 crore, is the best quarterly run-rate in recent times. Much of the revenue growth was helped by execution of key orders related to missiles and thermal imagers. As revenues nearly doubled on a year-on-year (y-o-y) basis, it gave the much needed impetus to operating profit, margins and net profit. These parameters, too, saw exponential growth in Q1. Operating profit came in at Rs 163 crore against operating losses a year-ago. Thus, even operating profit margins at 9.5 per cent in Q1 looked bright. Likewise, net profit grew by 247 per cent y-o-y to Rs 125 crore, clearly indicating when operating lever is rightly placed and capacity utilisation improves, it reflects positively on overall profitability as well. 

The outlook remains healthy. Order inflow in Q1 was about Rs 2,200 crore, of which Rs 1,700 crore came towards manufacturing of audit trail-enabled electronic voting machines. With this, the order book now stands at Rs 40,100 crore, up 25 per cent y-o-y, which provides comfortable revenue visibility for more than 4.5 years. The order book largely comprised of surface-to-air missiles and communication systems orders. 

With the right levers in place, after the Q1 results, analysts at Edelweiss and Kotak Securities have marginally increased their earnings expectations on BEL. “We revise upwards the FY18 and FY19 earnings estimates by 2.5 and four per cent respectively, building in the strong execution surprise owing to recent large (order) wins and assign 25x FY19E price earnings with revised target price of Rs 225,” analysts at Edelweiss said. Those at Kotak have upgraded their recommendation on BEL from ‘accumulate’ to ‘buy’ with a target price of Rs 201. BEL’s stock gained over one per cent on Tuesday. But, with such strong results, the gains should have logically been a lot higher given how the market has rewarded companies which posted good Q1 results so far.

Therefore, a restrained stock price reaction in some way indicates the Street’s scepticism on the sustainability of the Q1 results or if a large part of the near-term expectations are priced in. In fact, even as brokerages increase their expectations, they are already building in revenue growth expectation of 18-22 per cent for FY18 versus 18 per cent demonstrated in FY17. The fact that BEL’s execution remains heavily dependent on government approval remains a major drawback, leaving little room for error. With this uncertainty hovering around, analysts at UBS caution about the possibility of deceleration in growth going ahead. At Rs 181, the stock is priced at rich valuations of over 22 times FY19 estimated earnings.