Bharat Electronics Limited : Well-Armed For Growth

Even if the ongoing virus pandemic has disrupted operations, the company’s business prospects look very encouraging at a point when the government continues to emphasize on ‘Make in India’ and indigenization of defence manufacturing.

Bharat Electronics Limited (BEL) is engaged in designing, manufacturing and supplying of electronics products and systems for defence as well as nondefence markets. The company’s principal products and services include weapon systems, radar and fire control systems and communication equipment. Its defence products include defence communication; radars; naval systems; command, control, communications, computers and intelligence systems; weapon systems; telecom and broadcast systems; electronic warfare; electro-optics; and solar photovoltaic systems. 

Its non-defence products include turnkey system solutions, civilian radars, e-governance systems and homeland security. Its other range of products includes electronic voting machines, communication equipment, radar warning receivers and casings. BEL offers electronic manufacturing services in areas of printed circuit board assembly and testing, precision machining and fabrication, opto-electronics components and assemblies, and offsets, among others.

Defence Sector 

Revenues from the defence sector contribute most towards BEL’s revenues. Analysts say that post a strong year in 2018, the global aerospace and defence industry experienced a descent business environment in 2019. While the defence sector continued to soar, growth in the commercial aerospace sector has slowed. In 2020, the aerospace and defence industry is expected to get back to its growth trajectory with the commercial aerospace sector recovering from its decline in 2019. 

The defence sector has sustained its growth in 2019 as security threats intensified, requiring governments worldwide to continue increasing their defence budgets. Defence expenditure is assumed to grow between 3-4 per cent in 2020 to reach an estimated USD 1.9 trillion as governments globally continue to modernize and recapitalize their militaries. Most probably, growth will likely be driven by increased defence spending in the United States as well as in other developing regions such as China and India.

However, some industry experts believe that as a result of the virus pandemic, defence revenue budgets may be reduced slightly. Meanwhile, it can naturally be understood that when there is geopolitical tension happening around India, there is an increased interest in defence businesses and related stocks. Indeed, during the recent India-China clash, the defence sector-related stocks were favoured by many. 

Financials

Looking at the quarterly trends on a consolidated financial basis, for the fourth quarter of FY20 the company reported net sales of Rs 5,728.57 crore, an increase of 51.43 per cent as against net sales of Rs 3,782.87 crore for the same quarter of the previous fiscal. PBDT also increased by 54.85 per cent for the fourth quarter of FY20 and was Rs 1,520.67 crore as compared to Rs 982.05 crore for the fourth quarter of FY19. For the fourth quarter of FY20, the net profit rose significantly by 74.73 per cent to Rs 1,038.92 crore as compared to Rs 594.58 crore in the fourth quarter of the previous fiscal. 

On the annual front, in FY20, the company reported net sales of Rs 12,636.58 crore, an increase of 6.6 per cent over net sales of Rs 11,854.70 crore reported in the previous fiscal. For FY20, the PBDT stood at Rs 2,850.26 crore, thus decreasing by 3.92 per cent YoY as against Rs 2,966.47 crore for FY19. In FY20, the net profit decreased by 3 per cent to Rs 1,792.63 crore from Rs 1,848.03 crore posted in the previous fiscal.

Thermal imaging cameras, integrated air command and control systems and part supply of long-range surface-to-air missiles were amongst the highest revenue contributors. A considerable reduction in trade receivables in FY20 compared to FY19 can be seen in BEL’s balance-sheet, thus indicating improvement in payments from the government. Though order inflows in FY20 were down by nearly 43 per cent, an order backlog of Rs 51,970 crore provides for better revenue visibility. 

Conclusion 

The company has a history of being a beneficiary in supplying equipments in collaboration with Defence Research and Development Organisation (DRDO) to the Ministry of Defence. With a strong support of nearly 50 per cent scientists and engineers and an established local vendor base, the company boasts of quality research in the defence space with huge capex being invested into research and development. Going forward, the Akash missile and coastal surveillance systems are some of the major orders the company received in FY20. 

Hence, its business prospects look very encouraging at a point when the government continues to emphasize on ‘Make in India’ and indigenization of defence manufacturing. The virus pandemic has indeed disrupted business operations and adversely impacted revenues of the government, which is one of the biggest customers of BEL. This could further delay payments. The lockdown that was implemented nationwide hit operations in the last week of March, as well as for the whole month of April and part of May, leading to stretched delivery schedules.

Though the financials for Q4FY20 don’t reflect any impact of the lockdown, it is believed that certain volatility may be seen in the Q1FY21 financial results. In spite of this, healthy growth is expected for the company on the basis of a strong order book and positive inflow of new orders annually. Some traction in execution and a favourable product mix will benefit BEL to stabilise during the current tough times. 

Additionally, BEL has been focusing on sustainable growth plans with enhancing manufacturing capabilities through modernisation and expansion of facilities, entering into joint ventures in existing and emerging businesses to enhance business visibility and looking to increase its foreign exports so as to increase its foreign exchange earnings. Along with being well-positioned in the industry, BEL has vast expertise to its advantage and with a shift in focus on increasing revenues from non-defence segments the company is well placed to benefit from a positive growth trend. Hence, we recommend a HOLD.