Strong order book, margin expansion keep investors’ faith in Bharat Electronics

Operating profit and net profit grew at an even stronger pace of 87% and 68%, respectively, thanks to a better product mix and improvement in profitability


BEL’s order inflows are expected to remain strong for the rest of this fiscal year and the next as well.
BEL’s order inflows are expected to remain strong for the rest of this fiscal year and the next as well.

The Bharat Electronics Ltd (BEL) stock jumped up after the company surprised the Street with a strong performance for the September quarter. Revenue increased 16% from a year ago. Operating profit and net profit grew at an even stronger pace of 87% and 68%, respectively, thanks to a better product mix and improvement in profitability.

Further, the company reported strong order inflows, which doubled from a year ago. The order backlog reached Rs.34,675 crore or 4.6 times the revenues notched up in the previous fiscal year.

That’s not all. Order inflows are expected to remain strong for the rest of the fiscal year and next year as well. With large projects in the order pipeline, analysts expect annual order inflows to average around Rs.10,000 crore for a couple of years. Compared to 6.3% average annual growth between 2010-11 and 2015-16, ICICI Securities Ltd expects BEL’s order backlog to increase 8.5% per year between 2015-16 and 2017-18.

The robust expectations and improvement in profitability have led to earnings upgrades. “We have upgraded our earnings by 5% for FY17 & FY18 to factor in better than expected margin performance,” Prabhudas Lilladher Pvt. Ltd said in a note.

That said, the upgrades are modest. They are mostly driven by improvement in margins. Revenue estimates are largely unchanged. Most analysts forecast BEL’s revenues to grow 10-12% in the current fiscal year, broadly in line with the management’s earlier guidance.

That is because of long execution cycles and the lumpy nature of BEL’s business. Revenues lagged Street estimates in both the March and June quarters. The September quarter revenues are in line with estimates. But a 20% drop in June quarter revenues means that growth in the first half of the current fiscal was anaemic at 2%, far lower than the management’s full-year tentative revenue growth guidance of 10%.

To achieve the guidance, the company has to deliver strong performance in the second half of the fiscal year. Still, the strong order backlog and impressive commentary about inflows means investors are keeping faith in the stock, which is up around 13% in the last six months.

While the strong margin expansion in the September quarter came as a positive surprise, for earnings to see more meaningful upgrades BEL has to continue to demonstrate strong execution capabilities and deliver strong performance on the revenue front in the second half of the fiscal year.

That will give the Street’s confidence about its execution capabilities and drive not only earnings estimates but also the stock, which at about 20 times the current fiscal estimates is no longer cheap.

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