Strong execution continues to propel Bharat Electronics
Defence equipment maker Bharat Electronics Ltd, which had reported an unexpectedly strong performance for April-June (Q1), has delivered another stellar quarter. Revenues are up 46%, on the back of a 96% rise in Q1, from the year-ago period. Ebitda (earnings before interest, tax, depreciation and amortization—a measure of profitability) margin expanded about four percentage points to 24% and profit after tax is up 19%.
The performance in the June quarter was boosted by execution of large projects. If headline numbers are anything to go by, strong execution continued in the last quarter as well. “Execution continues to be strong, driven by the IACCS (integrated air command and control system), weapon locating radar and Akash missile system orders,” Motilal Oswal Securities Ltd said in a note.
Cumulatively, revenue in the first half of the current fiscal year (FY18) is up 64%, compared to a 1.6% rise a year ago. The growth momentum and order book of Rs41,746 crore should see the company comfortably achieving its revenue target of Rs10,000 crore in FY18. Revenue in FY17 stood at Rs8,824 crore. The high order backlog, which stood at 4.8 times FY17 revenue as of last quarter, provides revenue visibility. Further, as Edelweiss Securities Ltd pointed out in the previous quarter’s (Q1) results review note, with the execution of large projects gaining traction, Bharat Electronics’ ability to post double-digit growth rates increasingly looks likely on a yearly basis.
But what needs to be seen is the company’s ability to keep up the momentum in profitability. The share of large systems and system integration projects is rising in the overall order book. These projects offer lower margins compared to product manufacturing. Add to this the rise in employee costs due to wage hikes and there’s a worry that margins will be suppressed. Employee expenses for instance jumped 44% last quarter.
While higher localization of raw materials and intermediate products are expected to help improve cost efficiencies, some analysts believe margin headwinds can be overcome by better execution. “We believe the impact on margin could be neutralised by increase in execution at over 15%. Thus, we see limited downside risk of max 1% to our margin assumption,” Antique Stock Broking Ltd said in a note released in September.
While last quarter’s performance where the company reported improvement in profitability with higher revenue growth lends credence to this argument, the lumpy nature of defence sector contracts means investors would do well to prepare for volatility in revenues.