2019 elections still some time away but defence stocks get the jitters2 min read . Updated: 21 Jun 2018, 05:31 PM IST
Bharat Electronics, Hindustan Aeronautics and Premier Explosives have hit new lows this month, losing substantial value over the last several months
The general election may still be some time away but the shares of leading defence equipment suppliers are already feeling the chill. Bharat Electronics Ltd (BEL), Hindustan Aeronautics Ltd (HAL) and Premier Explosives Ltd have hit new lows this month, losing substantial value over the last several months. The concern, says an analyst with a domestic broking firm, is that policy action and order awards may take a back seat as the government prepares for elections.
Even otherwise the recent financial performance has been sub-par. BEL and HAL reported a notable reduction in profits for the March 2018 quarter. BEL has seen cuts in earnings estimates on softening of margins and slowdown in order inflows in FY18. “A delay in the award of 2 large orders—Akash Missile and LRSAM for P17-A frigates—drove a slump in FY18 order inflows (-38% YoY)," JM Financial Research said in a note.
HAL’s performance did not impress either. Importantly the company has seen a sharp rise in trade receivables (up 83% from a year ago), stoking concerns about payment delays. With the defence ministry and the government of India being primary customers, the payments may not be at risk. But they can see delays in an election year.
Some fear the impact of the election to be more pronounced on order inflows. If the above mentioned two large orders do not materialize for BEL in the coming six months, the awarding may be pushed to FY20 when the new government takes office. “FY19 order intake will be front-ended, in our view, given advanced stage of Akash/LRSAM and upcoming elections," Edelweiss Securities Ltd said in a note on BEL. “Any potential delays could then result in awarding shifting to FY20, which remains a key monitorable."
Of course delays are not uncommon in the defence sector and one cannot tie the equipment suppliers’ fortunes to one general election. Also with an order book of about Rs40,000 crore (roughly four times FY18 revenues) firms such as BEL are well placed to tide over an order inflow slowdown, if any. Further, valuations have also eased a bit post the recent correction.
Even then, the concerns are proving to be a handicap. BEL is expected to hit a soft earnings phase in the first half of FY19 due to execution of low- margin orders. A savvy investor may as well wait for the stabilization of profitability, gauge the incoming government’s view of the defence spends and evaluate earnings triggers.