The net result is that Ebitda margin expanded to 24.5%. Photo: BEL
The net result is that Ebitda margin expanded to 24.5%. Photo: BEL

BEL’s order intake is upbeat but margins may have topped out

  • FY19 order book at 51,798 cr, up more than 29% from a year ago, underscores that BEL is among the low-cost makers
  • On the business front, the firm gained significant ground last year winning orders, including for surface-to-air missile systems

The increase in election-related orders of electronic voting machines and VVPAT (voter-verified paper audit trail) systems influenced Bharat Electronics Ltd’s (BEL’s) performance in the fourth quarter. The firm reported steady 10% growth in revenue on the back of strong execution in pending orders.

Another highlight of the Q4 numbers is that BEL surpassed analyst expectations on the Ebitda (earnings before interest, tax, depreciation and amortization) front. Service revenues, lower import content and better operating leverage drove Ebitda margin. The net result is that Ebitda margin expanded to 24.5%. This is about 130 basis points up from 23.2% clocked a year ago.

On the business front, the firm gained significant ground last year winning orders, including for surface-to-air missile systems. It also bagged smart city business, radar systems and other naval equipment orders. This helped it crank up the order book substantially in FY19 to 51,798 crore. This is a sizeable increase of more than 29% over FY18, and it underscores the point that BEL is among the low-cost producers.

This brings the firm’s order book to over four times its current revenues. Further, with the general elections over, new orders from the Akash Missile System and the coastal surveillance system are on the cards. That should help keep the revenue growth upbeat.

However, analysts don’t expect any margin expansion in the coming quarters. That’s because of the new pricing policy in defence contracts, which has proposed to cut margins for all new orders. Investors will have to keep a close watch on the margin numbers.

Also note, that defence procurement is complex and has often moved at a slow pace. Defence orders are also lumpy and tend to get bunched up. Further, competition from private entities has also been increasing in the defence procurement business.

Besides, the BEL stock reflects the growth in business over the last few months. The stock has already gained 29% in the past one month. “This, along with lower other income and higher tax outflow, will lead to flat EPS (earnings per share) over FY19-21. Moreover, the recent sharp rally (50% in the past four months) leaves limited room for upside," noted Edelweiss Securities Ltd in a note to clients.

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