Bharat Electronics: long on orders, short on earnings visibility

Sensitive technologies, dependency on multiple authorities for clearances and delays mean revenue could continue to be lumpy


Overall, BEL’s consolidated revenue grew just 6.4% in the past fiscal year, compared with the management’s guidance of 8-10%.
Overall, BEL’s consolidated revenue grew just 6.4% in the past fiscal year, compared with the management’s guidance of 8-10%.

Bharat Electronics Ltd (BEL) investors are an undemanding lot. Despite the company missing revenue forecasts, investors have driven up the stock 7% since it declared disappointing March-quarter earnings. The revenue for the January to March quarter missed estimates. Overall, BEL’s consolidated revenue grew just 6.4% in the past fiscal year, compared with the management’s guidance of 8-10%.

That said, the miss in revenue growth was somewhat compensated by strong margins and robust order inflows. Profitability rose to multi-year highs as BEL benefited from low costs and indigenization of work orders. Order inflows tripled as the firm signed several large contracts during the year. As a result, the order backlog jumped 48% from a year ago to Rs.32,022 crore. That is 4.2 times revenues for 2015-16 and, at first blush, signals earnings visibility in the quarters ahead.

The order inflows are expected to be strong this year, too. The finalization of large contracts by the defence forces can keep the order backlog high. “The company is eyeing sizeable value of projects going ahead both in its conventional areas and several first-of-its-kind projects,” Edelweiss Securities Ltd said in a note.

While this order book may have excited investors, it is not leading to any earnings upgrades. If anything, some analysts have pared their estimates for the current financial year. The bugbear remains slow revenue growth, which few analysts believe, will revive this year.

According to ICICI Securities Ltd, BEL’s large order backlog will take more than two years for execution. Also, as BEL began accepting turnkey contracts (responsible for implementation of full systems, rather than parts), margins are expected to shrink. These orders require purchases from third parties which can crimp profitability, ICICI Securities adds.

Thus, brokerages are reducing profit growth forecasts. “We have marginally tweaked our earnings estimate downward by 2-3% for FY17/18E to factor in lower-than-expected revenue performance; earnings downgrade was restricted on account of better-than-expected margins exit rate for Q4FY16,” Sharekhan Ltd said in a note.

Analysts expect current orders to drive BEL’s revenue and earnings from fiscal 2018 onwards. But the assumptions for these forecasts, too, are not watertight. Sensitive technologies, dependency on multiple authorities for clearances and delays mean revenue could continue to be lumpy.

The company is trying to counter this with increasing focus on exports and vendor collaboration. Success on this will be crucial for expansion of the stock valuation, which at 17-18 times one-year forward earnings estimate, is not cheap to own.

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