institutional equity research bharat...
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INSTITUTIONALEQUITYRESEARCH
Page|1|PHILLIPCAPITALINDIARESEARCH
BharatElectronics(BHEIN)Highvisibilityonorders+robustFCF=PremiumvaluationsINDIA|CAPITALGOODS|INITIATINGCOVERAGE
19June2017
WeinitiatecoverageonBharatElectronics(BEL),agovernmentowneddefencecompany,withaBUYratingandatargetpriceofRs220.Overthenextfiveyears,BELoffershighestvisibility on orders with limited susceptibility to competition compared to any othercapitalgoods company in our coverage. A 15% CAGR in FY1820 earnings, despite a(cyclically)highbase inFY17, coupledwitha4x increase inFCF (ex customeradvances)shouldhelpBELsustainitspremiumvaluations.
US$11bnorderopportunityinFY1820vs.US$6bninFY1517;limitedcompetitionWeestimateaUS$23bnorderopportunity forBELover thenext tenyears,ofwhichUS$11bnisrealisableoverthenextthreeyears.However,wehaveconservativelyassumedUS$7.7bn inourestimates,which still impliesa31%growthover theUS$5.9bnof inflows inFY1517.BELsR&Dexpenditure(9%ofrevenue),strongworkingrelationshipwithdefencelabs (DRDO),anddeepsupplychain (+13,000vendors)willhelpcountercompetition fromtheprivatesector.
RevenueCAGRtoaccelerateto13%inFY1820vs.5.6%inFY1116WeexpectBELsrevenuegrowthtobesubstantiallyhigheroverthenextthreeyears(13%CAGR) against amodest6%CAGRover FY1116.Managementsnet sales guidanceofRs100bn in FY18 implies 16% yoy growth over FY17s high base. Pace of executionwill befaster,aslargeprojectswoninthepasttwoyearsstartcontributingandcertainshortcycleprojectssuchaselectronicvotingmachinesandhandheldthermalimagersalsochipin.
Aggressivelyexpecta300bpsmargincontractioninFY1720withupsideriskstoearningsBELsEBITDAmarginsexpandedby11percentagepointsbetweenFY1317onaproductsheavy salesmix,andareata cyclicalhigh.However, from FY18, the shareof integrationprojects (where BELs valueadd is relatively lower than in products orders) in saleswillincrease. This, coupledwith the increase in employee costs due to 7th paycommissionrelatedwagehikes,shouldleadtoadownwardpressureonmarginsoverFY1820.However,large integrationprojectssuchas IACCS,Akash(sevensquadrons),andLRSAM(fourships),willaccountforjust40%ofBELsFY18orderbookourdetailedprojectwisemarginanalysissuggeststhattheweightedaveragemarginsoftheseprojectsshouldbe15%while60%oftheorderbook (thebalance) shouldhavemarginsof~22%.Thismeansmarginsof19.1%,implying only a 200bps margin contraction vs. FY17 while we have built in a 300bpscontraction.Hence,ourestimateof15%CAGRinFY1820earningshasanupsiderisk.
4xincreaseinFCFoverFY1820vs.FY1417,RoEstabledespitehighercashWe expect BELs free cash flow (FCF) to increase by 4x in FY1820 vs. FY1417, despiteexcluding the impact of customer advances and accounting for higher capex over thisperiod. FCF/PAT should increase to 65% in FY20 from 20% in FY16. RoEs should remainstableat19.4%betweenFY17andFY20,ashigherfixedassetturnovershouldhelpmaintainRoEs,despitehighercashbalances(93%ofnetworthinFY20vs.50%inFY17).
Valuation:Highcorrelationtoorderinflows;initiatewithBUYratingandTPofRs220BELhasseenareratingoverthepastfouryearsduetoanimprovingenvironmentfororderinflowsandpositivesurpriseinearningsduetoanonlinearexpansioninmargins.BELsPEhasa0.8xcorrelationtoorder inflowsandshouldremainthemaindriverof itsvaluations.WeexpectBELtoretain itspremiumvaluations,as itexceedsexpectationsonneworders,execution,andmargins,andgenerateshigh freecash.Amongkeymonitorableswouldbethe extentofmargin contraction,whichwebelieve shouldbe lower thanwhatwehaveincorporatedintoourestimates.Consensusseemstobeoverestimatingthenegativeimpactofintegrationprojectsonmargins.WeinitiatewithaBUYratingandtargetpriceofRs220,whichisbasedon25xourFY20earningsonhighordervisibility.Thestockcurrentlytradesat23x/19xourFY19/20EPS.
BUYCMPRS168TARGETRS220(+31%)COMPANYDATAO/SSHARES(MN): 2234MARKETCAP(RSBN): 375MARKETCAP(USDBN): 5.852WKHI/LO(RS): 187/118LIQUIDITY3M(USDMN): 12.2PARVALUE(RS): 1SHAREHOLDINGPATTERN,% Mar17 Dec16 Sep16PROMOTERS: 68.2 74.4 75.0FII/NRI: 6.7 4.3 4.0FI/MF: 17.7 15.8 14.5NONPRO: 0.7 0.4 1.3PUBLIC&OTHERS: 6.7 5.2 5.2PRICEPERFORMANCE,%
1MTH 3MTH 1YRABS 7.9 1.8 32.4RELTOBSE 9.6 3.4 15.1PRICEVS.SENSEX
Source:PhillipCapitalIndiaResearchKEYFINANCIALSRsmn FY17 FY18E FY19ENetSales 86,119 100,063 113,077EBIDTA 18,327 18,561 20,642NetProfit 16,034 14,865 16,578EPS,Rs 7.2 6.6 7.4PER,x 23.4 25.6 22.8EV/EBIDTA,x 18.4 17.2 14.7P/BV,x 3.9 3.2 2.7ROE,% 19.4 18.6 18.8
Source:PhillipCapitalIndiaResearchEst. JonasBhutta(+912262464119)[email protected](+912262464120)[email protected]
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Apr16 Oct16 Apr17
BEL BSESensex
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FocuschartsandtablesWebuildin31%growthinordersoverFY1820vs.FY1517; Paceofexecutiontoincrease:13%CAGRinFY1820vs.6%couldbepotentiallyevenhigher overFY1116
MarginsshouldberesilientafteradeclineinFY18despite 4xincreaseinFCFexcustomeradvancesoverFY1820highershareofintegrationsales
ROEsshouldbestableat20%despitehighercashbalances BELsPEishighlycorrelatedtoorderinflows
Source:Company,PhillipCapitalIndiaResearchEstimates
385
497
687
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FY1517 FY1820E Totalopportunities
Rsbn
+31%
+78%
0%
5%
10%
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20%
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130
140Reveneus(Rsbn) %yoy(rhs)
CAGR13.5%
CAGR5.6%
10.5%
14.2%
16.7%
18.7%
21.3%
18.5% 18.3%18.7%
10%
12%
14%
16%
18%
20%
22%
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
150%
100%
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100%
150%
(10)
(5)
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20FCF(ExAdvances)(Rsbn) FCF(%ofPAT)rhs)
19.4% 19.8%
289bps80bps 37bps
438bps 0bps
0%
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15%
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25%
RoEFY17
Marginim
pact
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pact
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RoEFY20E
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BEL1yrfwdPE(x) 1yrfwdinflows(Rsbn)
Correl0.79x
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India:DefencesectoroverviewIndiadefencespendingis1.5%ofGDPIndiascapitalinvestmentondefenceequipmenthasaveragedUS$12bnforthelastfiveyears(FY1418,meagre2%CAGR)andaccountsfor1.5%ofGDP.Indiasdefencecapitalexpenditureis1.5%ofGDP whiletheglobalaverageis2.5%
Source:Company,PhillipCapitalIndiaResearchEstimates
90%ofIndiasdefencebudgetisallocatedtocommitted Budgetgrowthisconstrained,importsubstitutionliabilities willbethetrend
Source:SIPRI,MoD,PhillipCapitalIndiaResearchEstimates
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
2.20%
2.40%
2.60%
2.80%
3.00%
FY98A
FY99A
FY00A
FY01A
FY02A
FY03A
FY04A
FY05A
FY06A
FY07A
FY08A
FY09A
FY10A
FY11A
FY12A
FY13A
FY14A
FY15A
FY16A
FY17A
FY18E
India'sdefencebudget%ofGDP
0
2
4
6
8
10
12
14
16
Saud
iArabia
Israel
Russia
Pakistan
USA
India
France
China
UK
Brazil
Italy
SouthAfrica
Japan
90% 90% 95% 88% 89% 86% 84%
10% 10% 5% 12% 11% 14% 16%
0%
20%
40%
60%
80%
100%
FY12 FY13 FY14 FY15 FY16 FY17E FY18E
Committedliabilities Newschemes
20%
30%
40%
50%
60%
70%
80%
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY30E
Imported Indigenous
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AboutBELBEL:IndiaspremierdefenceelectronicscompanyBELisagovernmentownedleadingdefenceelectronicscompany.Setupin1954,BELnow produces stateofart equipment in defence communication, radar, navalsystems, electronicwarfare, electro optics, and C4I systems. It alsomanufacturescivilianproductssuchaselectronicvotingmachines.BELhasastrongmanufacturingbase with nine factories across India. 47% of its 9,700 employees arescientists/engineersanditinvests79%ofitsannualrevenuesonR&D.BEL:Keyproductssegments
Source:Company,PhillipCapitalIndiaResearch
Radars Missile Systems Defence Communications Electronic Warfare & AvionicsNetwork Centric Systems
(C4ISR)
Tank Electronics & Gun Weapon System upgrades Civilian productsElectro OpticsNaval Systems
BHARAT ELECTRONICS
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Page|5|PHILLIPCAPITALINDIARESEARCH
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Moats:R&Dfocus,DRDO,deepsupplychain47%ofBELsworkforceconsistsscientist/engineersOverthepastfifteenyears,whileBELstotalemployeebasehasreducedby30%,buttheshareofitstechnicalemployees(scientistsandengineers)increasedto47%from9% inthisperiod.Typically, itsemployeeshaveanaverageexperienceof>10years,andthishasenabledthecompanytonotonlyrestrictlossofknowledgeuponretrials,butalsoallowedittoadoptnewtechnologies.Technicalemployeesaccountfor47%ofitsworkforceinFY17vs.9%inFY03
Source:Company,PhillipCapitalIndiaResearchEstimatesInvests79%ofrevenuesonR&DThe everincreasingneed fornewerdefence technologies, coupledwith effortsonlocalisation of technologies that come under Transfer of Technology (ToT),necessitates investments inR&D.Onanaverage,BEL invests79%of itsrevenueonR&D,whichhelpsgarner4060%ofitsannualrevenues.BELinvested9%ofitsrevenuesonR&DinFY17
Source:Company,PhillipCapitalIndiaResearch
0%
10%
20%
30%
40%
50%
9,000
10,000
11,000
12,000
13,000
14,000
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Totalemployees %ofScientist/Engineers(rhs)
5%
6%
7%
8%
9%
10%
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
R&Dexpenditure(Rsbn) %ofSales(rhs)
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ProductsdevelopedbyBELinthepasttwoyears,someofwhichhavealreadytranslatedintoordersFY16 FY153DSurveillanceRadar SchilkaAirDefenceSystemforArmyLBand2DAirSurveillanceRadarforNavy, LynxU1MODCoastalSurveillanceRadar,SatcomTerminals SoftwareDefinedRadioforNavy,Communication
Network(LinkIIModIII)forNavySoftwareDefinedRadio(NavalVersionNC),multimodemultibandshipbornetwochannelV/UHFradios
ExportversionofUnitLevelSwitchBoard(ULSB)Mk.III
AdvancedCompositeCommunicationSystem(ACCS),
ShipDataNetwork(SDN)forP16Aship
IntegratedSonarSuiteforSubmarines TestBedforAirDefenceControlandReportingSystem
IntegratedEWSystemforMountainousTerrain XbandTRmoduleGunnerSightforT90,DriverSightforMBTArjun
Source:Company,PhillipCapitalIndiaResearchStrongworkingrelationshipwithDRDOBEL has historicallyworked closelywith Indias defence laboratories, especially onprojects in radars, electronic warfare, andmissile systems. In FY16, products codeveloped byBEL andDRDO accounted for 47% of its revenues. This relationshiphelpsBELstayaheadofthecurveonfutureproductsthatthearmedforcesrequire.BELderives>80%ofitsrevenuesfromproductsthatitdevelopedorwithDRDO
Source:Company,PhillipCapitalIndiaResearchDeepsupplychainBELhasasupplychainofmorethan13,000vendors.Suchadeepvendorbase isacompetitiveadvantageagainstrelativelynewprivatesectorplayers,whowillrequirecontinuityinordersandover510yearstodevelopsuchasupplierbase.
BELhas>13,000vendors,77%ofwhicharedomesticcompanies No. %oftotalIndian 10,095 77%Foreign 3,026 23%Total 13,121
Source:Company,PhillipCapitalIndiaResearch
81%
83%
75% 75%
78%
81%
78%
85%
80%
86%
68%
72%
76%
80%
84%
88%
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Indigenouslydevelopedproductsshareinrevenue
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FiveyearcapexplantohelpmaintainleadinmissilesystemsandoptronicsBELhasoutlinedacapexofRs23bnoverFY1721vs.Rs15bnincurredoverFY1216.It has envisaged amajor investment of Rs 5bn for a defencesystem integrationfacility in Andhra Pradesh, which will enable BEL to expand its missile systembusiness.Inaddition,thecompanywilladoptanewstateoftheartXR5technologyforimageintensifiertubestobeusedinpassivenightvisiondevices.BEL:areasofcapexovernextfiveyears Defencesystemsintegrationcomplex Microchannelplatetechnologyfornightvisiondevices Cooledthermalimagertechnology Optoelectronicsmanufacturingfacility ImageintensifiertubeXR5technology CentreforhighpowerlaserIndiasspendonmanagingobsolescenceisalmostacaptiveopportunityforBELTheidealsplitofdefencebudgetsindevelopedcountriesis25:50:25onobsolescencemanagement:510yearrequirement:stateofart.However,inIndiascase,theratioisskewed towardsupgradingexistingproducts tomanage technologyobsolescence(60%)due to inadequatebudgets fornewproducts (30%)andstateofart research(10%).DuetoBELsinvolvementinthe1stgenerationversionofmostradar,communicationsystems, and electronic warfare systems, it becomes a beneficiary of systemupgrades,whichtypicallyaccountfor3040%ofitsannualorderinflow.Thispieceofthe business is mainly free of competition. In addition, the company is alsodevelopingnewproducts tomeetdemands inmissile systems, radars,and tacticalcommunication,whichwillbegrowthareasforthenextfiveyears;heretoo,weseelimitedcompetition.Indiaallocates
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BHARATELECTRONICS INITIATINGCOVERAGE
RobustorderinflowprospectsinFY182031%growthovertheprecedingthreeyearsBased on our channel checks, we have identified Rs 687bn (US$ 11bn) of orderopportunitiesforBELoverthenextthreeyears,mostlyonnomination,with limitedprivatesector competition. However, we build in Rs 500bn (US$ 7.7bn) into ourestimates for FY1820.We expect some project awards to be delayed by 1218monthsbecauseofgeneralelection(inFY20)andduetopaucityoffunds.EvenourlowerorderinflowestimatesforFY1820representsastrong31%growthoverFY1517.LargeprojectsthatwilldriveinflowinthenextthreeyearsareElectronicWarfaresystems (Rs140bn),MRSAM (Rs120bn),LRSAM (Rs100bn),andAkash forArmy&Airforce(Rs85bn).Systemsofsystemstodriveorders,accountingfor70%oforderopportunityBELsabilitytoexecutecomplexprogramshasimprovedovertime.Ithasproveditsability to integrate large systems. As a result, we expect almost 70% of orderopportunitiestobeforintegrationprojectswhiletherestwillbeforproducts.Webuildin31%growthinBELFY1820ordersvs.FY1517. WeestimatelowerordersinFY20becauseofHowever,thiscanbehigheriforderingtimelinesaremet generalelections
Source:Company,PhillipCapitalIndiaResearchEstimates70%oforderopportunitiesoverFY1820willbeforintegrationprojects
Source:PhillipCapitalIndiaResearch
385
497
687
300
400
500
600
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FY1517 FY1820E Totalopportunities
Rsbn
+31%
+78%
50%
0%
50%
100%
150%
200%
250%
50
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FY14 FY15 FY16 FY17 FY18e FY19e FY20e
Orderinflows(Rsbn) %YoY(rhs)
Product,30%
Projects,70%
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PaceofexecutiontopickupWeforecasta13%CAGRinFY1820revenuesoverahighbaseBEL surprised consensus in FY17 with a higherthanexpected revenue growth of17.5%yoyagainstitsoriginalexpectationof1012%yoy.StartofexecutionofcertainshortcycleproductsordersonreceivingBulkProductionClearances(BPCs)ledtothesurprise inFY17.ForFY18, themanagementexpectsRs100bn innetsales inFY18,whichimplies17%yoygrowth.Going forward, intoFY1820,weexpectRs40bn incremental revenue contributionfromthreemajorprogramsIACCS(Rs16bn),LRSAM(Rs17bn),andAkash(Rs7bn).In addition, BEL is supposed to supply Rs 24bn of Electronic VotingMachines bySeptember2018,whichshouldalsoaidsalesgrowthinFY18andFY19.WeexpectpaceofexecutiontoincreaseoverFY1820
Source:Company,PhillipCapitalIndiaResearchEstimatesIncrementalgrowthinrevenuestobemainlydrivenbyintegrationprojectsOrdervalue(Rsbn) FY17e FY18e FY19e FY20e FY21e FY22e FY23e FY24e FY25eTotalrevenuefromlargeprojects 2 24 36 42 68 82 55 55 47Incrementalrevenue 2 23 12 6 26 14 (27) (8)Systemrevenue 2 11 25 42 63 74 45 50 47Productrevenue 13 11 5 8 10 5 Systemrevenue%ofconsolsales 2% 11% 22% 33% 47% 50% 28% 31% 31%
Source:Company,PhillipCapitalIndiaResearchEstimates
BooktobillhasneverbeenaconcernforBELBELsFY17orderbook(Rs400bn) is4.8x itsrevenues,andhenceprovides longtermrevenue visibility. In addition, as we expect growth in orders in FY1819, itsorderbookshouldrisetoRs560bnbyFY19,whichwouldbe5xFY19sales.
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FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Reveneus(Rsbn) %yoy(rhs)
CAGR13.5%
CAGR5.6%
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BHARATELECTRONICS INITIATINGCOVERAGE
BELsorderbookis5xitsFY17revenues
Source:Company,PhillipCapitalIndiaResearchEstimates
MarginstoremainstrongafterFY18drag(unlikelastcycle)BELcurrentlyenjoyscyclicallyhighmargins...BELsEBITDAmarginsexpandedsharply(by11percentagepoints)intheinpastfiveyears(FY1317)aidedbyimprovingsalesmix.WeseetwotypesofmargindragsinFY1820In FY18, BEL will face increased cost pressures because of: (1) employee wagerevisionunderthe7thPayCommission,and(2)growingshareofintegrationprojectsinrevenues.Consequently,weestimatea300bpsdeclineinFY1720EBITDAmarginsto 18.5%. However, BEL has said that itwill be able to restrict the downside inmarginsto100150bpsduetothesecostpressures.The companys recurring employee cost (excluding the impact of provision forincrease in gratuity limit,which is onetime) should increase by 25% in FY18; thisshouldresultina130bpsdeclineinmargins.WealsoexpectexecutiononintegrationprojectssuchasIACCSandLRSAMtopickuppace in FY1820. These projects are expected to have lower grossmargins in theinitialperiodbecauseoflearningcurve(incaseofLRSAM)andahighportionofcivilconstruction(incaseofIACCS).WeestimateBELsgrossmarginstocontractto43.7%inFY20from49%inFY17.BELsemployeecostsshouldriseby25%yoyinFY18 Growingshareofintegrationprojectsinrevenuesshoulddueto7thPC leadtolowergrossmargins
Source:Company,PhillipCapitalIndiaResearchEstimates
1.0
2.0
3.0
4.0
5.0
6.0
100
200
300
400
500
600
700
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Orderbook(Rsbn) BooktoBill(x)(rhs)
14%
15%
16%
17%
18%
19%
10
12
14
16
18
20
22
FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Employeecost(Rsbn) %ofsales(rhs)
37.6%
42.1%44.8%
47.8% 48.8%
46.0%44.5% 43.7%
20%
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FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
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AfterasharpcontractioninFY18,nofurtherdeclineWebelievethatconsensusisundulyworriedaboutimpactofhigherintegrationsaleson BELs EBITDA margins. Based on our analysis of potential margins on threeintegration projects, viz., IACCS, LRSAM (four ships) and Akash (seven squadrons),whichwillaccount for40%ofBELsFY18orderbook,webelieve that theweightedaveragemarginsontheseprojectswouldbe15%.However,thebalanceorderbook(60%)wouldcommandmarginsof~22%therebythecompanywidemarginsshouldbe 19.1%. This implies a 200bps margin contraction over FY1720, compared to300bpsbuiltintoourestimates.Hence,webelievethatunlikeinthelastcycle(FY0813),wheremarginscontractedsharplyfromapeakof26%to10.5%duetopoorsalesmix, in the current environment, despite higher share of integration projects inrevenues,marginswillberesilient.Ouranalysislargeprojectsmarginssuggestsanupsiderisktoourestimates
IACCS Akash(7sqd) LRSAM(4ships)Ordervalue(Rsbn) 79 55 64Ordersas%ofFY18estimatedorderbook 17% 12% 14%%ofordervalueOutsourced 65% 60% 62%Coreproduct 35% 40% 38%Revenues(Rsbn) 79 55 64Outsourced 51 33 40Coreproduct 28 22 24EBITDAMarginOutsourced 10% 10% 10%Coreproduct 25% 25% 20%EBITDA(Rsbn) 12 9 9Outsourced 5 3 4Coreproduct 7 6 5BlendedEBITDAmargin 15.3% 16.0% 13.8%WeightedAverageMarginsontheseorders 15.0%Averagemarginsonbalanceorderbook 22.0%Companywidemargin 19.1%OurFY1820marginestimate 18.5%
Source:Company,PhillipCapitalIndiaResearchWeexpectmarginstoberesilientafteradeclineinFY18
Source:Company,PhillipCapitalIndiaResearchEstimates
10.5%
14.2%
16.7%
18.7%
21.3%
18.5% 18.3%18.7%
10%
12%
14%
16%
18%
20%
22%
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
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15%CAGRinFY1820earningsWeexpectBELsrecurringearningsCAGRat15%overFY1820,drivenbya13%CAGRin revenues, aswe estimatemargins to remain largely flat.Growth in earnings iscommendable,giventhehighbaseof(FY1517),whenearningsCAGRwas20%.Webelievethatthereareupsideriskstoourearningsifthemargincontractionislowerthanourestimate.WeseerecurringearningsCAGRof15%inFY1820,despiteahighbase
Source:Company,PhillipCapitalIndiaResearchEstimates
SharpincreaseinFCFdespitehighercapexBEL enjoys the benefit of customer advances on neworders (typically 15% of thecontractvalueupfront),whichhelpsmaintainanegativeworkingcapitalcycle.Weexpectorder inflows to growby31%over thenext three years (vs.precedingthreeyears),whichshouldhelpBELtomaintainnegativeworkingcapital.Evenafterexcludingcustomeradvances,weexpectBELsFCFtogrow4xoverFY1820vs.FY1417.Thisisdespiteahighercapexplannedoverthenextfiveyears(Rs23bninFY1721vs.Rs15bnFY1216).Consequently,weexpectFCF to increase from20%ofPAT inFY16to65%inFY20.WeexpectFCFexcustomeradvancestogrow4xinFY1820vs.FY1417
Source:Company,PhillipCapitalIndiaResearchEstimates
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25%
0
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25
FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
RecurringPAT(Rsbn) %ChYoY(rhs)
CAGR20%
CAGR15%
150%
100%
50%
0%
50%
100%
150%
(10)
(5)
5
10
15
20
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
FCF(ExAdvances)(Rsbn) FCF(%ofPAT)rhs)
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RoEtoremainstableonhigherassetturnsWeexpectBELsRoEstoremainstableat1920%overFY1720despiteanincreaseincashbalanceto91%ofnetworthinFY20from50%inFY17.Increaseinfixedassetturnoverto1.3xfrom1xshouldhelpmaintainRoEs.HighassetturnsshouldhelpmaintainRoEsdespitehighercashbalances
Source:Company,PhillipCapitalIndiaResearch
ValuationsandoutlookBELalreadytradesaboveaveragesIn thepast fouryears,BELsvaluationshave reratedon improvingenvironment fornewordersandhigherthanexpectedexpansioninmargins.Thestocknowtradesat23x / 19x FY19/20 EPS,which is at a premium to its longterm twoyearforwardaverage(sinceFY98)of10xand+1SDof16x.BELtradesaboveitslongtermaverages
Source:Company,PhillipCapitalIndiaResearch
19.4% 19.8%
289bps80bps 37bps
438bps 0bps
0%
5%
10%
15%
20%
25%
RoEFY17
Marginim
pact
Otherincome
Taxim
pact
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Leverage
RoEFY20E
Average
+1SD
1SD
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25
30
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Apr16
Apr17
BEL1yrfwdPE(x)
Average
+1SD
1SD
0
5
10
15
20
25
30
Apr06
Apr07
Apr08
Apr09
Apr10
Apr11
Apr12
Apr13
Apr14
Apr15
Apr16
Apr17
BEL2yrfwdPE(x)
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BELsPEishighlycorrelatedtoorderinflowsBasedonouranalysisofBELsvaluationwegatherthatBELsoneyearforwardPEhasa0.8xcorrelationtoitsorderinflows.BELsPEishighlycorrelatedtoorderinflows;0.8xcorrelation
Source:Company,PhillipCapitalIndiaResearchExpectfurtherrerating;initiatewithaBUYratingWe expect BELs valuation to rerate further on higherthanexpected order inflowopportunities over the next five years, robust sales growth, resilientmargins andRoEs, andhigh cashflow generation.Hence,we valueBEL at25xour FY20EPS toarriveata targetpriceofRs220,which impliesa31%upside from current levels.InitiatewithaBUYrating.
50
100
150
200
250
0
5
10
15
20
25
30
Apr06
Oct06
Apr07
Oct07
Apr08
Oct08
Apr09
Oct09
Apr10
Oct10
Apr11
Oct11
Apr12
Oct12
Apr13
Oct13
Apr14
Oct14
Apr15
Oct15
Apr16
Oct16
Apr17
Oct17
BEL1yrfwdPE(x) 1yrfwdinflows(Rsbn)
Correl0.79x
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Financials
IncomeStatementY/EMar,Rsmn FY17 FY18e FY19e FY20eNetsales 86,119 100,063 113,077 128,966Growth,% 18 16 13 14Totalincome 86,119 100,063 113,077 128,966Rawmaterialexpenses 44,131 54,034 62,758 72,608Employeeexpenses 14,773 18,472 19,455 20,486OtherOperatingexpenses 8,888 8,996 10,222 11,788EBITDA(Core) 18,327 18,561 20,642 24,085Growth,% 33.6 1.3 11.2 16.7Margin,% 21.3 18.5 18.3 18.7Depreciation 1,915 2,270 2,608 2,927EBIT 16,412 16,291 18,033 21,158Growth,% 36.8 (0.7) 10.7 17.3Margin,% 19.1 16.3 15.9 16.4Interestpaid 118 50 50 50OtherNonOperatingIncome 4,710 3,303 3,985 4,912NonrecurringItems 557 1,110 0 0Pretaxprofit 20,447 18,434 21,968 26,020Taxprovided 4,971 4,886 5,492 6,505Profitaftertax 15,476 13,548 16,476 19,515NetProfit 15,476 13,548 16,476 19,515Growth,% 22.6 (8.6) 12.4 18.4NetProfit(adjusted) 16,034 14,865 16,578 19,476Unadj.shares(m) 2,234 2,234 2,234 2,234Wtdavgshares(m) 2,234 2,234 2,234 2,234BalanceSheetY/EMar,Rsmn FY17 FY18e FY19e FY20eCash&bank 37,900 55,360 70,912 91,528Debtors 43,550 51,046 56,299 60,874Inventory 49,050 48,412 52,548 54,619Loans&advances 12,381 11,592 13,025 13,203Othercurrentassets 1,062 1,234 1,394 1,590Totalcurrentassets 143,943 167,644 194,178 221,814Investments 3,180 3,180 3,180 3,180Grossfixedassets 32,551 43,114 47,614 51,614Less:Depreciation 19,998 22,268 24,876 27,803Add:CapitalWIP 6,563 0 0 0Netfixedassets 19,116 20,846 22,738 23,811Totalassets 171,561 196,993 225,418 254,127Currentliabilities 96,391 114,320 132,789 149,911Provisions 0 0 0 0Totalcurrentliabilities 96,391 114,320 132,789 149,911Totalliabilities 96,391 114,320 132,789 149,911Paidupcapital 2,234 2,234 2,234 2,234Reserves&surplus 72,937 80,439 90,396 101,983Shareholdersequity 75,170 82,673 92,629 104,216Totalequity&liabilities 171,561 196,993 225,418 254,128Source:Company,PhillipCapitalIndiaResearchEstimates
CashFlowY/EMar,Rsmn FY17 FY18e FY19e FY20ePretaxprofit 20,447 18,434 21,968 26,020Depreciation 1,915 2,270 2,608 2,927Chginworkingcapital 14,938 11,688 7,486 10,102Totaltaxpaid 5,686 4,886 5,492 6,505Cashflowfromoperatingactivities 1,581 25,363 22,636 27,682Capitalexpenditure 6,968 4,000 4,500 4,000Cashflowfrominvestingactivities 3,494 1,807 515 912Freecashflow 5,075 23,556 22,121 28,594Equityraised/(repaid) 166 0 0 0Dividend(incl.tax) 6,046 6,519 7,928 9,391Otherfinancingactivities 24,132 424 1,359 1,412Cashflowfromfinancingactivities 30,345 6,096 6,569 7,978Netchgincash 35,420 17,461 15,551 20,616ValuationRatios
FY17 FY18e FY19e FY20ePerSharedataEPS(INR) 7.2 6.6 7.4 8.7Growth,% 22.6 (8.6) 12.4 18.4BookNAV/share(INR) 33.7 37.0 41.5 46.7FDEPS(INR) 7.2 6.6 7.4 8.7CEPS(INR) 8.3 8.1 8.5 10.0CFPS(INR) (1.3) 10.8 10.1 12.4DPS(INR) 2.3 2.4 3.0 3.5ReturnratiosReturnonassets(%) 8.8 7.4 7.8 8.2Returnonequity(%) 19.4 18.6 18.8 19.8Returnoncapitalemployed(%) 18.9 17.2 18.9 19.9TurnoverratiosAssetturnover(x) 4.6 4.2 7.1 14.8Sales/Totalassets(x) 0.5 0.5 0.5 0.5Sales/NetFA(x) 5.2 5.0 5.2 5.5Workingcapital/Sales(x) 0.1 (0.0) (0.1) (0.2)Receivabledays 184.6 186.2 181.7 172.3Inventorydays 207.9 176.6 169.6 154.6Payabledays 108.5 104.2 106.5 110.5Workingcapitaldays 40.9 (7.4) (30.7) (55.5)Liquidityratios Currentratio(x) 1.5 1.5 1.5 1.5Quickratio(x) 1.0 1.0 1.1 1.1Interestcover(x) 139.3 325.8 360.7 423.2Netdebt/Equity(%) (50.4) (67.0) (76.6) (87.8)Valuation PER(x) 23.4 25.6 22.8 19.2PEG(x)yoygrowth 1.0 (3.0) 1.8 1.0Price/Book(x) 5.0 4.5 4.1 3.6Yield(%) 1.3 1.4 1.8 2.1EV/Netsales(x) 3.9 3.2 2.7 2.2EV/EBITDA(x) 18.4 17.2 14.7 11.8
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RatingMethodologyWeratestockonabsolutereturnbasis.Ourtargetpriceforthestockshasaninvestmenthorizonofoneyear.Rating Criteria Definition
BUY >=+15% Targetpriceisequaltoormorethan15%ofcurrentmarketprice
NEUTRAL 15%>to
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DisclosuresandDisclaimersPhillipCapital(India)Pvt.Ltd.hasthree independentequityresearchgroups: InstitutionalEquities, InstitutionalEquityDerivatives,andPrivateClientGroup.ThisreporthasbeenpreparedbyInstitutionalEquitiesGroup.Theviewsandopinionsexpressedinthisdocumentmay,maynotmatch,ormaybecontraryattimeswiththeviews,estimates,rating,andtargetpriceoftheotherequityresearchgroupsofPhillipCapital(India)Pvt.Ltd.
ThisreportisissuedbyPhillipCapital(India)Pvt.Ltd.,whichisregulatedbytheSEBI.PhillipCapital(India)Pvt.Ltd.isasubsidiaryofPhillip(Mauritius)Pvt.Ltd.References to "PCIPL" in this report shallmeanPhillipCapital (India)Pvt. Ltdunlessotherwise stated.This report ispreparedanddistributedbyPCIPL forinformationpurposesonly,andneither the information containedherein,noranyopinionexpressed shouldbe construedordeemed tobe construedassolicitationorasofferingadviceforthepurposesofthepurchaseorsaleofanysecurity,investment,orderivatives.TheinformationandopinionscontainedinthereportwereconsideredbyPCIPLtobevalidwhenpublished.ThereportalsocontainsinformationprovidedtoPCIPLbythirdparties.Thesourceofsuchinformationwillusuallybedisclosedinthereport.WhilstPCIPLhastakenallreasonablestepstoensurethatthisinformationiscorrect,PCIPLdoesnotofferanywarrantyastotheaccuracyorcompletenessofsuchinformation.AnypersonplacingrelianceonthereporttoundertaketradingdoessoentirelyathisorherownriskandPCIPLdoesnotacceptanyliabilityasaresult.SecuritiesandDerivativesmarketsmaybesubjecttorapidandunexpectedpricemovementsandpastperformanceisnotnecessarilyanindicationoffutureperformance.
Thisreportdoesnotregardthespecificinvestmentobjectives,financialsituation,andtheparticularneedsofanyspecificpersonwhomayreceivethisreport.Investorsmustundertakeindependentanalysiswiththeirownlegal,tax,andfinancialadvisorsandreachtheirownconclusionsregardingtheappropriatenessof investing in any securitiesor investment strategiesdiscussedor recommended in this report and shouldunderstand that statements regarding futureprospectsmaynotbe realised.Undernocircumstancescan itbeusedorconsideredasanoffer to sellorasa solicitationofanyoffer tobuyor sell thesecuritiesmentionedwithinit.Theinformationcontainedintheresearchreportsmayhavebeentakenfromtradeandstatisticalservicesandothersources,whichPCILbelieveisreliable.PhillipCapital(India)Pvt.Ltd.oranyofitsgroup/associate/affiliatecompaniesdonotguaranteethatsuchinformationisaccurateorcompleteanditshouldnotberelieduponassuch.Anyopinionsexpressedreflectjudgmentsatthisdateandaresubjecttochangewithoutnotice.
Important:Thesedisclosuresanddisclaimersmustberead inconjunctionwiththeresearchreportofwhich it formspart.Receiptanduseof theresearchreportissubjecttoallaspectsofthesedisclosuresanddisclaimers.Additionalinformationabouttheissuersandsecuritiesdiscussedinthisresearchreportisavailableonrequest.
Certifications:Theresearchanalyst(s)whopreparedthisresearchreportherebycertifiesthattheviewsexpressedinthisresearchreportaccuratelyreflecttheresearchanalystspersonalviewsaboutallofthesubject issuersand/orsecurities,thattheanalyst(s)havenoknownconflictof interestandnopartoftheresearchanalystscompensationwas,is,orwillbe,directlyorindirectly,relatedtothespecificviewsorrecommendationscontainedinthisresearchreport.
AdditionalDisclosuresofInterest:UnlessspecificallymentionedinPointNo.9below:1. TheResearchAnalyst(s),PCIL,or itsassociatesorrelativesoftheResearchAnalystdoesnothaveanyfinancialinterest inthecompany(ies)covered in
thisreport.2. TheResearchAnalyst,PCILoritsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelydonotholdmorethan1%ofthesecuritiesofthe
company(ies)coveredinthisreportasoftheendofthemonthimmediatelyprecedingthedistributionoftheresearchreport.3. TheResearchAnalyst,his/herassociate,his/herrelative,andPCIL,donothaveanyothermaterialconflictofinterestatthetimeofpublicationofthis
researchreport.4. TheResearchAnalyst,PCIL,anditsassociateshavenotreceivedcompensationforinvestmentbankingormerchantbankingorbrokerageservicesorfor
anyotherproductsorservicesfromthecompany(ies)coveredinthisreport,inthepasttwelvemonths.5. TheResearchAnalyst,PCILoritsassociateshavenotmanagedorcomanagedintheprevioustwelvemonths,aprivateorpublicofferingofsecuritiesfor
thecompany(ies)coveredinthisreport.6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in
connectionwiththeresearchreport.7. TheResearchAnalysthasnotservedasanOfficer,Director,oremployeeofthecompany(ies)coveredintheResearchreport.8. TheResearchAnalystandPCILhasnotbeenengagedinmarketmakingactivityforthecompany(ies)coveredintheResearchreport.9. DetailsofPCIL,ResearchAnalystanditsassociatespertainingtothecompaniescoveredintheResearchreport:Sr.no. Particulars Yes/No
1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12months forinvestmentbankingtransactionbyPCIL
No
2 WhetherResearchAnalyst,PCILor itsassociatesorrelativesoftheResearchAnalystaffiliatescollectivelyholdmorethan1%ofthecompany(ies)coveredintheResearchreport
No
3 WhethercompensationhasbeenreceivedbyPCILoritsassociatesfromthecompany(ies)coveredintheResearchreport No4 PCILor itsaffiliateshavemanagedorcomanaged in theprevious twelvemonthsaprivateorpublicofferingofsecurities for the
company(ies)coveredintheResearchreportNo
5 ResearchAnalyst,hisassociate,PCILor itsassociateshavereceivedcompensation for investmentbankingormerchantbankingorbrokerageservicesor foranyotherproductsorservices from thecompany(ies)covered in theResearch report, in the lasttwelvemonths
No
Independence:PhillipCapital (India)Pvt.Ltd.hasnothadan investmentbanking relationshipwith,andhasnot receivedanycompensation for investmentbankingservices from, thesubject issuers in thepast twelve (12)months,andPhillipCapital (India)Pvt.Ltddoesnotanticipate receivingor intend toseekcompensationforinvestmentbankingservicesfromthesubjectissuersinthenextthree(3)months.PhillipCapital(India)Pvt.Ltdisnotamarketmakerinthesecuritiesmentionedinthisresearchreport,althoughit,oritsaffiliates/employees,mayhavepositionsin,purchaseorsell,orbemateriallyinterestedinanyofthesecuritiescoveredinthereport.
SuitabilityandRisks:This research report is for informationalpurposesonlyand isnot tailored to the specific investmentobjectives, financial situationorparticularrequirementsofany individualrecipienthereof.Certainsecuritiesmaygiverisetosubstantialrisksandmaynotbesuitableforcertain investors.Eachinvestormustmakeitsowndeterminationastotheappropriatenessofanysecuritiesreferredtointhisresearchreportbaseduponthelegal,taxandaccountingconsiderationsapplicabletosuch investorand itsown investmentobjectivesorstrategy, itsfinancialsituationand its investingexperience.Thevalueofany securitymaybepositivelyoradverselyaffectedby changes in foreignexchangeor interest rates,aswellasbyother financial,economic,orpoliticalfactors.Pastperformanceisnotnecessarilyindicativeoffutureperformanceorresults.
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Sources,CompletenessandAccuracy:ThematerialhereinisbaseduponinformationobtainedfromsourcesthatPCIPLandtheresearchanalystbelievetobereliable,butneitherPCIPLnortheresearchanalystrepresentsorguaranteesthattheinformationcontainedhereinisaccurateorcompleteanditshouldnotberelieduponassuch.Opinionsexpressedhereinarecurrentopinionsasofthedateappearingonthismaterial,andaresubjecttochangewithoutnotice.Furthermore,PCIPLisundernoobligationtoupdateorkeeptheinformationcurrent.Withoutlimitinganyoftheforegoing,innoeventshallPCIL,anyofitsaffiliates/employees or any thirdparty involved in, or related to computingor compiling the informationhave any liability for anydamagesof any kindincludingbutnotlimitedtoanydirectorconsequentiallossordamage,howeverarising,fromtheuseofthisdocument.
Copyright:The copyright in this research reportbelongsexclusively toPCIPL.All rightsare reserved.Anyunauthoriseduseordisclosure isprohibited.Noreprintingorreproduction,inwholeorinpart,ispermittedwithoutthePCIPLspriorconsent,exceptthatarecipientmayreprintitforinternalcirculationonlyandonlyifitisreprintedinitsentirety.
Caution:Riskof loss in trading/investmentcanbesubstantialandevenmore than theamount/margingivenbyyou. Investment insecuritiesmarketaresubject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whethertrading/investmentisappropriateforyouinlightofyourexperience,objectives,financialresourcesandotherrelevantcircumstances.PhillipCapitalandanyofits employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned thattrading/investments in financialmarkets are subject tomarket risks and are advised to seek independent third party trading/investment advice outsidePhillipCapital/group/associates/affiliates/directors/employeesbeforeandduringyour trading/investment.There isnoguarantee/assuranceas to returnsorprofits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates ofPhillipCapitals group entities or affiliates is not inducing you for trading/investing in the financialmarket(s). Trading/Investment decision is your soleresponsibility.YoumustalsoreadtheRiskDisclosureDocumentandDosandDontsbeforeinvesting.
Kindlynotethatpastperformanceisnotnecessarilyaguidetofutureperformance.
ForDetailedDisclaimer:Pleasevisitourwebsitewww.phillipcapital.in
ForU.S.personsonly:ThisresearchreportisaproductofPhillipCapital(India)PvtLtd.,whichistheemployeroftheresearchanalyst(s)whohaspreparedtheresearchreport.Theresearchanalyst(s)preparingtheresearchreportis/areresidentoutsidetheUnitedStates(U.S.)andarenotassociatedpersonsofanyU.S.regulatedbrokerdealer and therefore the analyst(s) is/arenot subject to supervisionby aU.S.brokerdealer, and is/arenot required to satisfy theregulatorylicensingrequirementsofFINRAorrequiredtootherwisecomplywithU.S.rulesorregulationsregarding,amongotherthings,communicationswithasubjectcompany,publicappearances,andtradingsecuritiesheldbyaresearchanalystaccount.
This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a6(b)(4) of theU.S.SecuritiesandExchangeAct,1934(theExchangeAct)andinterpretationsthereofbytheU.S.SecuritiesandExchangeCommission(SEC)inrelianceonRule15a6(a)(2).IftherecipientofthisreportisnotaMajorInstitutionalInvestorasspecifiedabove,thenitshouldnotactuponthisreportandreturnthesametothesender.Further,thisreportmaynotbecopied,duplicated,and/ortransmittedonwardtoanyU.S.person,whichisnotaMajorInstitutionalInvestor.InrelianceontheexemptionfromregistrationprovidedbyRule15a6oftheExchangeActandinterpretationsthereofbytheSECinordertoconductcertainbusinesswithMajorInstitutionalInvestors,PhillipCapital(India)PvtLtd.hasenteredintoanagreementwithaU.S.registeredbrokerdealer,Decker&Co,LLC.TransactionsinsecuritiesdiscussedinthisresearchreportshouldbeeffectedthroughDecker&Co,LLCoranotherU.S.registeredbrokerdealer.IfDistributionistoAustralianInvestorsThisreportisproducedbyPhillipCapital(India)PvtLtdandisbeingdistributedinAustraliabyPhillipCapitalLimited(AustralianFinancialServicesLicenceNo.246827).Thisreportcontainsgeneralsecuritiesadviceanddoesnottake intoaccountyourpersonalobjectives,situationandneeds.PleasereadtheDisclosuresandDisclaimerssetoutabove.Byreceivingorreadingthisreport,youagreetobeboundbythetermsandlimitationssetoutabove.Anyfailuretocomplywiththese terms and limitationsmay constitute a violationof law. This reporthasbeenprovided to you forpersonaluse only and shallnot be reproduced,distributedorpublishedbyyou inwholeor inpart,foranypurpose. Ifyouhavereceivedthisreportbymistake,pleasedeleteordestroy it,andnotifythesenderimmediately.PhillipCapital(India)Pvt.Ltd.Registeredoffice:No.1,18thFloor,UrmiEstate,95GanpatraoKadamMarg,LowerParelWest,Mumbai400013
2017-06-19T15:22:12+0530Jonas Hemant Bhutta