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Photo: iStock

BEL’s optimistic targets come with certain downside risks

Experts caution that the stretched cash flows could weigh on its working capital cycle and slow execution

Shares of defence public sector unit Bharat Electronics Ltd (BEL) saw a runaway rally of more than 12% in two trading sessions. On Friday, the stock gained 5% on the NSE.

BEL’s management is oozing confidence about clocking double-digit top-line growth in the coming years. At its analyst meet held on 19 November, it said growth is likely to be aided by business opportunities in defence as well as non-defence segments. Further, the management has also assured analysts that it is capable of maintaining operating margins at about 20%.

Jefferies India Pvt. Ltd said: “In the analyst meet, management said the LRSAM orders received in FY19 were on new margins (that are lower) and contributed to FY20 revenues." LRSAM is a long-range surface-to-air missile. Despite that, the company was able to maintain margins and is now expecting this trajectory to continue. “We believe this is an important re-rating trigger as lack of clarity contributed to some of the last 2-3 years’ de-rating," Jefferies analysts said in a 19 November report.

Hope for the future
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Hope for the future

According to the management, quick-reaction surface-to-air missiles is a big bet for the next decade and BEL is open to exports if the government permits. In the half-year ended September, BEL’s order inflows stood at 4,980 crore. The management highlighted that sudden covid-19 related shutdowns led to delays in discussions for a few large orders. Even so, BEL expects to meet its targeted annual order inflows run rate of 15,000 crore in FY21.

On the flip side, BEL is facing some challenges on the receivables front. Analysts cautioned that the stretched cash flows could weigh on its working capital cycle and, consequently, slow execution. There are downside risks to BEL’s targets too. Delays in conversion of new orders due to covid-19 will restrict revenue growth in the 7-8% range, versus the target of double digits over the next two years, said JM Financial Institutional Securities Ltd analysts. Similarly, sustaining margins will be challenging as the share of orders under the new pricing policy and civilian orders will increase from FY22, wherein margins are likely to be lower by 150-200 basis points, said the JM Financial report of 19 November. One basis point is one hundredth of a percentage point.

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