A sizeable order book position notwithstanding, Bharat Electronics Ltd’s stock did not quite deliver returns to shareholders for about two years. Its stock price has halved from about ₹160 two years ago. But over the past month, shareholders have been sitting on gains of about 9% as investors are seemingly looking at the beaten-down stock price. Shares continue to tick higher with gains of about 1% today.
Sure enough, signs of a slow recovery are visible. BEL’s order book has been getting a boost from government initiatives such as the Akash Missile program. The present order book has increased by 43% to ₹57,600 crore. Also, it is expected to bag orders of about ₹13,000-15,000 crore this year.
At a recent annual analyst meet, the management talked of 12-15% revenue growth, with a notable 19-21% Ebitda margin. That would be decent, considering that FY19 included revenue from sales of electronic voting machines.
A major worry the Street had was the lowering of margins from new orders which has decreased from 12.5% to 7.5%. The management has, however, clarified that it has been controlling costs and bettering its sales mix with higher service income.
These measures should keep margins at about 19-21% in the short term and about 17-19% in the long run. “Concerns about margins were allayed to some extent as management highlighted various efficiency, cost levers and he improvement in the revenue mix," said analysts at JM Financial Institutional Securities Ltd. in a recent note to clients.
Nevertheless, investors must watch out for trade receivables. The company’s trade receivables in FY19 have shortened to about 166 days of turnover, down from 183 in FY18. But, as it depends on the government for payment, a delay could prove an overhang.
“Working capital has been stretched due to clients’ budget constraints. However, some improvement in receivables is expected due to advances from the Akash Missile order, which should restrict further working-capital deterioration," said analysts at Prabhudas Lilladhar Pvt. Ltd. in a recent note to clients.
Even then, given the stock has been beaten down in the recent past, its valuations may look inexpensive at about 14 times FY19 earnings. But gains from now may be slow as much depends on how well the company can execute new orders at lower costs.