UBS downgrades BEL stock to 'Neutral' after Q1FY25 results; Here is why

Bharat Electronics Share Price: Brokerage firm UBS has downgraded its rating on the state-owned Navratna defence company Bharat Electronics (BEL) to Neutral from Buy following the company's results for the first quarter of FY25. However, the brokerage sees nearly a 6 per cent upside potential in BEL stock and has revised the price target to Rs 340 from Rs 333 for the next 12 months.

In its report, UBS pointed out that, typical of a long-cycle business, BEL has experienced a significant 145 per cent stock rally over the past 12 months, largely driven by a 70 per cent increase in order intake in FY24 compared to management guidance. Earnings upgrades during this period were 13 per cent, reflecting a strong valuation re-rating.

 

"On our consensus-leading new order/revenue/Ebitda estimates, BEL factors in a healthy Rs 30,000-34,000 crore/year new order run rate (Rs 25,000 crore previously), 19 per cent top-line/Ebitda CAGRs (FY24-27E), and a 12-month forward PE of 48x, leaving little room for a positive surprise," said UBS in its report.

Critical stock triggers for the next 12-24 months

Commenting on critical stock triggers for BEL, UBS said, "Based on our bottom-up new order pipeline, we have a higher new order estimate for FY25-27 than consensus, with a 3.4 per cent FY24-27E CAGR, compared to flattish for consensus, implying Rs 7,600 crore higher orders over the next three years."

While base orders could continue for BEL, the timely closure of large-ticket orders remains key for sustaining a higher 19% top-line CAGR (compared to 11%/12% in the past 5/10 years). UBS believes that surface-to-air missile platforms remain the most important growth lever for BEL, as the largest subset of its pipeline.

BEL Q1FY25 read-through

On Monday, July 29, BEL posted a year-on-year jump of 46.89 per cent in its net profit to Rs 791.00 crore in Q1FY25, compared to Rs 538.48 crore during the corresponding quarter of FY24. The company's sales increased by 20.11 per cent to Rs 4,243.57 crore in the quarter under review, compared to Rs 3,532.94 crore in Q1FY24.

Commenting on the first quarter results, UBS said, "BEL reported sales/EBITDA/PAT growth of 20/41/46 per cent, beating consensus estimates by 4/12/24 per cent and UBS estimates by 9/28/33 per cent. New orders were in line with the UBS estimate, at Rs 5000 crore (implying a 9-month target of Rs 20,000/25,000 crore to meet FY25 guidance/UBSe)."

The brokerage noted that management's guidance of a 15 per cent top-line and a Rs 25,000 crore order run rate seems achievable. "However, we do not see major upside to that and intend to seek greater clarity on timelines for larger platforms such as QRSAM (quick-reaction SAM system) and future Akash orders, etc.," UBS added.

Neutral on full earnings/valuation

While UBS remains directionally constructive on BEL's earnings and order book growth, it believes the stock's medium-term growth potential is priced in.

"We downgrade our rating to Neutral, while raising our price target from Rs 333 to Rs 340, based on an unchanged target PE of 40x on 12-month forward earnings as of July 2025," said UBS. The brokerage has retained above-consensus earnings and new order assumptions.