Bharat Electronics’ strength hinges on robust order inflows

Bharat Electronics Ltd’s (BEL) earnings in the December quarter (Q3FY23) were decent. However, that wasn’t enough to soothe investor worries on muted order inflow, which has led to concerns that the company would miss its FY23 guidance. BEL’s shares fell by nearly 6% on Monday when the benchmark Nifty50 index rose a tad.

The order inflow in the nine months ended December (9MFY23) stood at about 3,700 crore, according to Nuvama Research analysts. Thus, the likelihood of BEL achieving its FY23 order inflow guidance of around 20,000 crore appears slim. Nuvama analysts expect BEL to bag orders worth 15,700 crore in FY23. Thanks to the weak order inflow in Q3, BEL’s total order book as of December-end stood at 50,116 crore, a multi-quarter low. The order backlog provides revenue visibility of 2.9 times on a trailing 12-month basis.

Graphic: Mint

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Graphic: Mint

It helps that BEL’s order execution is on track, which led to nearly 12% year-on-year growth in Q3 operating revenue. It is well placed to achieve its FY23 revenue growth guidance of 15%. But given the weakness in margin, it remains to be seen if the company meets its FY23 target of 22%-23%. Ebitda (earnings before interest, taxes, depreciation and amortization) margin in 9MFY23 stood at nearly 20%.

The growing opportunities in the defence sector and push for indigenization augurs well for BEL. “We expect the potential for defence orders, especially production of quick reaction surface-to-air missile, to aid earnings in the near term. We also believe that the recently accorded Acceptance of Necessity for capital acquisition proposals by the Defence Acquisition Council holds good potential for the company,» said ICICI Securities.

Investors would do well to track the upcoming budget. Any positive developments for the defence sector would be a key upside trigger for the stock. But further catalysts would depend on BEL finalizing orders of significant value in Q4. “We believe that potential delay in finalization of orders can lead to FY24 witnessing sharp increase in order inflow as against its standard annual order inflow run rate of 18,000–20,000 crore,» pointed out Antique Stock Broking.

Further, BEL’s diversification into non-defence areas is a key monitorable as this would open new growth opportunities. The stock is down about 22% from its 52-week high of 114.65 apiece, seen in September. Valuations don’t appear too demanding. The stock trades at about 19 times FY24 estimated earnings, Bloomberg data show.

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