Recommendation From Electrical Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year 

LIGHT UP YOUR PORTFOLIO WITH BEL

Bharat Electronics Ltd.

HERE IS WHY
Healthy order inflows
Rising exports
Efficient working capital management 

Bharat Electronics Ltd. (BEL) is a Navratna company with 37 per cent market share in Indian defence electronics. Its core capabilities lie in the areas of radar and weapon systems, defence communication and electronic warfare. 

On the standalone quarterly front, the total income from operations rose 7.65 per cent YoY to Rs.3,884.64 crore in Q4FY19 from Rs.3,608.46 crore in Q4FY18. EBITDA increased 16.68 per cent YoY to Rs.929.03 crore in Q4FY19 from Rs.796.19 crore in Q4FY18. EBITDA margin improved 190 bps YoY to 23.9 per cent in Q4FY19 from 22.1 per cent in Q4FY18. This is on account of gross margin expansion of 630 bps YoY. The improvement in gross margin is attributable to execution of higher proportion of indigenous orders during the quarter. Net profit showcased a growth of 19.67 per cent YoY to Rs.668.62 crore in Q4FY19 from Rs.558.74 crore in Q4FY18. Consequently, EPS increased by 20.18 per cent YoY to Rs.2.74 in Q4FY19 from Rs.2.28 in Q4FY18. 

During the quarter, the company's export revenues came in at US$ 21.6 million, while the export order book stood at US$ 116.62 million. In order to enhance the contribution from this segment, the company has already set up offices in Sri Lanka, Myanmar, etc. 

The consolidated financial performance for the full year ended March 31, 2019 stands as follows: Total income from operations rose 16.95 per cent YoY to Rs.12,164.17 crore in FY19 from Rs.10,400.80 crore in FY18. EBITDA demonstrated a healthy growth of 42.80 per cent YoY to Rs.2,906.23 crore in FY19 as against Rs.2,035.21 crore in FY18. The company reported EBITDA margin of 23.9 per cent in FY19 as against 19.6 per cent in FY18. Net profit soared 31.32 per cent YoY to Rs.1,848.03 crore in FY19 from Rs.1,407.25 crore in FY18. As a result, EPS surged 32.76 per cent YoY to Rs.7.74 in FY19 from Rs.5.83 in FY18. 

The improvement in EBITDA margin is attributable to execution of high margin orders and cost rationalisation. Presently, the company has an order backlog of Rs.52,000 crore, thereby awarding a healthy revenue visibility for the next three years. The order inflows in FY19 rose 133 per cent YoY to Rs.23,671 crore. These orders pertain to LRSAM, 'Smart Cities' business, home land security system, AMC for radars, naval equipment, upgradation of fire control systems and setting up of a weapon repair facility at the Naval Shipyard. The Akash missile order is likely to be finalized in FY20. The LRSAM order, which is still in the initial stages, is expected to start generating revenues towards the end of FY20. 

BEL maintained a consistent and prudent focus on receivables throughout FY19. The benefits of this manifested in the form of efficient working capital management. This helped the management refrain from availing debt. The non-defence segments like homeland security, cyber security and Smart Cities have generated an order book of Rs.1,500 crore. They have the potential to contribute reasonably to topline, although with modest margins over the next few years. By virtue of these factors, we urge our reader-investors to BUY this stock.