About a week back, state-owned Bharat Electronics Ltd (BEL) won a Rs4,300 crore order for missiles from the Indian Air Force. This will add to its already strong order book, which is three times its 2008-09 revenue, even as the results for the December quarter reaffirm its growth story. With a turnover close to Rs5,000 crore in 2008-09, BEL has an order book of around Rs15,000 crore, besides being a niche player as a defence public sector enterprise. The fact that the government committed a higher outlay for defence expenditure—from 2% of gross domestic product to 3% in the last budget—implies that there could be a steady stream of orders coming its way. Nearly 80% of BEL’s revenue accrues from the defence sector.
Unlike some of the state-owned firms in the power and infrastructure segment where execution hinges on several factors such as legal approvals on land acquisition, environmental clearances and the like, BEL’s execution and billing as reflected by its revenue does not indicate any shortfall. For the December quarter, BEL’s revenue grew 76% over the year-ago period to around Rs1,180 crore. Even in the June and September quarters, revenue was up around 66% and 134%, respectively, over the year-ago periods. On a cumulative basis, revenue was, therefore, up around 86% over the year-ago period at Rs3,459 crore.
Graphics by Ahmed Raza Khan/Mint
Operating profit margins have improved in the last two sequential quarters of September and December to around 25% and 26%, respectively, from a low of 10% in the June quarter, when the company was faced with high raw material costs.
Nevertheless, BEL’s profit margins could be dented as material costs rise. Also, it could face competition from international rivals. One risk factor is the high exposure to just one sector, namely defence, where the order book accretion is lumpy rather than steady. That accounts for the company’s recent move to diversify into non-defence areas such as voting machines.
Looking ahead, the “offset clause”, although not yet implemented in its true spirit, will boost the order book and revenues. The offset clause specifies that international vendors who supply to the Indian defence sector are to necessarily outsource around 30% of their requirements from Indian firms.
Sequentially, the third quarter revenue contracted by 6%. Net profit, too, was 6% lower at Rs224 crore, although 82% higher on a year-on-year basis. Typically, BEL records around 40-50% of its revenue in the last fiscal quarter. Analysts’ consensus is that the company’s revenue for 2009-10 would be 15% higher than that in 2008-09, when revenue was Rs4,583 crore.
Interest in the stock has been high in the last 12 months, following reports reiterating that the Budget will see an increase in government expenditure on the defence sector. The stock has remained well insulated from the current turmoil, falling much less than the market, after rising 50% since the end of October.
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