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Bharat Electronics’ strong order book overshadows the execution hurdles

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Bharat Electronics Ltd’s strong order book overshadows the execution hurdles it faced in the March quarter (Q4 FY22) because of the Russia-Ukraine war and chip shortage.

Analysts at JM Financial Institutional Securities recently met the senior management of Bharat Electronics where the latter stated that semiconductor shortage limited its ability to post additional revenue of 2,700 crore in FY22. As the situation eases, the company expects to book this in FY23. Even so, it aims to achieve revenue growth of only 15% in FY23. Revenues rose at a lower-than-expected rate of 9% year-on-year in FY22 to almost 15,314 crore.

Most of FY23 revenue is expected to come from the order book of 57,570 crore as on FY22-end. This implies limited dependence on new orders in FY23. In any case, the company expects strong order inflows of 20,000- 22,000 crore in FY23.

The government’s move to indigenize items such as weapons and systems bodes well as it would boost order inflows. Also, such measures would lead to a drop in material costs to the extent of 200-300 basis points (bps), according to the company. One basis point is 0.01%. It now expects Ebitda (earnings before interest, tax, depreciation and amortization) margin in FY23 to be in the range of 21-23% versus the earlier guidance of 20-22%. In FY22, this measure was 21.6%. “We forecast sales and earnings per share CAGR (compound annual growth rate) of 16%/19% over FY22-24E led by a robust order pipeline, scale up in new businesses and increased indigenization,” said JM Financial’s analysts in a report on 14 June.

However, the impact on gross margins needs to be seen as the non-defence mix increases. Moreover, the majority of the company’s order inflows depends on the funds allotted to ministry of defence and this may be a concern. “The recent cut in excise duties, rising subsidies in the agriculture sector, and elevated oil prices already weigh on government finances,” said an analyst requesting anonymity.

Meanwhile, Bloomberg data shows the stock is trading at almost 19 times estimated earnings for FY24. The company’s robust order book offers good revenue visibility. Investors have taken note. The shares of the company are 7.5% down from the 52-week high seen on 19 April, but the stock has risen by about 14% so far in calendar year 2022 versus a nearly 11% drop in the Nifty500 index. Execution of orders will remain a key monitorable.

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