Bharat Electronics revenues will lag order inflow surge
Investors for now have several reasons to believe revenue growth may not take off in a big way any time soon
Bharat Electronics Ltd continues to build on its gains. The stock, which doubled in 2014, is up 22% so far this year. The catalyst, of course, has been the change in the central government and its emphasis on defence manufacturing, which is helping the company.
So far in the current fiscal year, Bharat Electronics has received orders worth ₹ 2,300 crore and expects inflows to touch ₹ 10,000 crore, the management told analysts earlier this month. According to two brokerage firms, orders averaged at ₹ 5,000 crore per year in the past three years.
With several projects in the pipeline, inflows may remain strong next fiscal year as well. “Also, order inflow will remain at the same levels in FY17," Elara Securities (India) Pvt. Ltd said in a note. “Inflows are expected in some key areas such as the integrated air force command and control system, weapons-locating radar and Akash weapons system."
The commentary, however, does not match the revenue projections. The management has guided for a modest 8-10% revenue growth for the next couple of years. Some analysts believe the guidance is “conservative" and actual growth can be higher.
But investors for now have several reasons to believe revenue growth may not take off in a big way any time soon. One is the changing nature of the company’s business. The company’s business portfolio is moving from component manufacturing to system integration.
The second reason is the complex nature of the defence business. Though orders are being booked at a rapid pace, their execution is scattered over a period of time. Several first-time programmes require clearances, which is a time-consuming process, Motilal Oswal Securities Ltd said in a note. And deliveries in the end are linked to the readiness of the systems project (missile, ships, etc.), Motilal Oswal added.
Perhaps that may be one reason why Bharat Electronics, in its annual report, said it is targeting a turnover of about ₹ 7,400 crore (10.5% growth) in spite of a strong order book of ₹ 21,000 crore or three times the previous fiscal year’s revenues.
Investors may be enthused by the strong order book and the business potential. But for a stock that is trading at 21 times the current fiscal year earnings per share estimates, the growth rate should be higher.
The writer does not own shares in the above-mentioned companies.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!