In a scenario where investors prefer to stay away from high debt and interest rate-sensitive companies, Bharat Electronics Ltd (BEL) emerges as a good defensive bet. Apart from its cash-rich position, the raw material intensity of its business is also lower. Further, while BEL has a dominant status in the defence sector, its revenue visibility is the highest (order book to sales is four times) in the capital goods sector, with low execution risk.
LOAD OF CASH
Cash constitutes about 50 per cent each of the company’s total assets and market capitalisation. While this has impacted the return profile (return on capital employed of around 23 per cent was down 200 basis points in FY11 compared to FY10), it came to the rescue of the company in the past one year, which witnessed significant rise in interest costs by other infrastructure players.
In FY11, other income formed 28.5 per cent of BEL’s total net profit, which helped the net profit margin to jump 142 basis points to 15.2 per cent, despite flat sales growth and operational performance. While sales rose marginally and operating profit margin (OPM) declined substantially in the June quarter, net profit margins leaped about 430 basis points aided by a 182 per cent rise in other income to Rs 145 crore.
| HEALTHY GROWTH | ||
| In Rs crore | FY11 | FY12E |
| Net sales | 5,627 | 6,352 |
| Y-o-Y chg (%) | 4.6 | 12.9 |
| Operating profit | 919 | 1,083 |
| Y-o-Y chg (%) | 8.5 | 17.8 |
| Net profit | 878 | 992 |
| Y-o-Y chg (%) | 16.9 | 13.0 |
| EPS (Rs ) | 110.0 | 124.0 |
| Y-o-Y chg (%) | 17.0 | 12.7 |
| P/E (x) | 14.5 | 12.8 |
| E: Estimates Source: Company, Analysts’ report | ||
THE ROAD AHEAD
After a flat financial performance in the last five years, BEL is gearing for high growth through initiatives such as joint ventures (to generate Rs 2,000 crore within five years), diversification (UID and nuclear projects) and innovation by focussing on research and development. As a consequence, analysts expect revenues to grow by 16-18 per cent annually, in the next two years.
Margins are likely to be maintained at FY11 levels of about 16 per cent, though there is downside risk as the share of projects business (currently 20 per cent of revenues), which involves considerable level of outsourcing, is expected to rise. “Margin pressure will cap profitability upside from revenue growth despite a robust order book,” said Rajarshi Maitra, analyst, Enam Securities.
The management has retained its guidance of 10-12 per cent revenue growth in FY12 (Rs 6,200 crore) and stable margins with a downside risk of 100 basis points. “Given the strong order backlog, the company is well placed to achieve the target,” says Sanjeev Zarbade, analyst, Kotak Securities.
More From This Section
BEL’s order book position of Rs 23,600 crore doubled in FY11 (24 per cent executable in FY12) and analysts expected it to grow at a robust pace even without the offset clause (30 per cent of an order to be sub-contracted domestically).
However, since the sector is opened to private sector players, competition cannot be ruled out though it is expected to be less severe. The focus on increasing the share of civil projects (20 per cent of sales) such as Electronic Voting Machines, Solar Powered LED-Based traffic signal lights, simputers and set top boxes, will help diversify the business.
VALUATIONS
Analysts say BEL is the best play for risk-averse investors during challenging times. At current levels, the stock trades at 12 times its FY13 estimated earnings. However, excluding estimated cash per share of Rs 800 for FY13, the valuations look attractive. Considering the average target price estimated by analysts, there is 24 per cent upside potential in the stock.