BEL aims to be a $1 bn company

Aggressive growth targeted but accounting remains conservative

Bharat Electronics Limited, the public sector technology leader under the defence ministry which has been voted number one mid size defence company globally by Aviation Week, aims to become a $1 billion company by 2006-07 and clock exports of $100 million.

In 2003-04 it recorded a turnover of Rs 2,791 crore, up 11.28 per cent on the previous year, and exports of $14 million.

BEL has traditionally been a low profile company coasting along on the basis of defence orders. But the opening up of the Indian defence sector to private companies and the more liberal approach adopted by the Indian government to defence exports has brought about a change in BEL.

It is increasingly seeking to access global technology and leveraging this along with its own to raise exports. It has entered into a partnership with an Israeli company to make items like hand held thermal imaging devices and navigational systems which will be marketed by the Israelis.

It is also in talks with US and European manufacturers for more such arrangements.

The company has also set an ambitious target for technologically upgrading itself. Last year it spent 4.8 per cent of its revenues on R&D, which is probably the highest among non-pharma manufacturing companies.

It also plans to raise its capital expenditure from Rs 110 crore last year to Rs 200 crore in two years.

While aggressively pursuing technology and growth, in keeping with the common public sector practice, it has followed conservative accounting polices and actually underestimated its earnings.

Analysts estimate that if you take out the one time provision of Rs 150 crore, post tax profit last year grew by 39 per cent on a comparable basis and not by the reported 17 per cent. Actual post tax profit is over a third more than the declared Rs 330 crore.

Being in the technology business, the company rightly makes provisions for obsolescence. But what is not clear is why it made a 7 per cent provision for doubtful debts last year when 93 per cent of its receivables were from the government. This would imply that it has written off its entire receivables from non-government customers.

Conservatism in financial reporting has gone hand in hand with sound management practices aimed at controlling costs and raising productivity. Fixed costs have dropped from 29 per cent of revenues to 18 per cent in five years. Employee productivity has simultaneously gone up.

In the same five-year period, operating revenues per employees have grown at a compound annual rate of 16 per cent. Consequently, EPS has grown over the period by a compound annual rate of 30 per cent.

The government connection and the nature of its business (defence related) have turned out to be both an advantage and a disadvantage. Defence orders typically don't come in a steady flow and when they come are executed over long periods of time. All this adds to volatility.

Also, to derisk the defence business (a sudden war or sanctions can cut off supplies), the company maintains a huge inventory, of over 500 days. The redeeming feature is that over the last five years this has come down from nearly 800 days.

Government orders mean a good deal of cash advances, making for a lot of cash floating around. But at the end of the day, analysts feel, the company is genuinely cash rich and free cash levels are rising.

The cash is not lying around but earns a healthy return on capital employed. This has gone up from 18 per cent in 1999-00 to an estimated 27 per cent in 2003-04.

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In Five Years

• ROCE up from 18 per cent to 27 per cent
• Fixed costs down from 29 per cent to 18 per cent of revenues
• Operating revenue per employee grew at 16 per cent CAGR
• EPS grew by 30 per cent CAGR