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Investors zero in on Bharat Electronics

A strong order book in the defence sector backed by improved research and development (R&D) investments over the past few years has grabbed attention of investors.

, ET Bureau|
Updated: Jan 12, 2017, 08.17 AM IST
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The Bangalore-headquartered market leader in defence electronics manufactures radar, electronic warfare, avionics, military communication system.
The Bangalore-headquartered market leader in defence electronics manufactures radar, electronic warfare, avionics, military communication system.
ET Intelligence Group: Shares of Bharat Electronics (BEL) have gained 22% in the past three months compared with a 2% drop in the benchmark S&P BSE Sensex. A strong order book in the defence sector backed by improved research and development (R&D) investments over the past few years has grabbed attention of investors.

The Bangalore-headquartered market leader in defence electronics manufactures radar, electronic warfare, avionics, military communication system. Defencerelated products account for more than two-thirds of its revenue. The government owns 74% stake in the company.

The growth momentum is expected to continue since the company is likely to be the frontrunner for several upcoming defence orders such as supply of missile system for Akash missile for seven squadrons of the Indian Air Force, and upgrade of Samyukta -used for jamming enemy surveillance. In addition, the company is bidding for battle management and tactical communication system orders which will be collectively worth Rs 45,000-50,000 crore.

Analysts expect BEL to bag orders worth Rs 12,000-13,000 crore for each of the next three years. At the end of September 2016 quarter, the company had outstanding order book of Rs 34,700 crore which provides revenue visibility for the next four years. The company's management has guided for 8-10% revenue growth over the next five years, which seems to be an easy target given the order visibility .

In September 2016, the company announced share buyback equivalent of 6.9% of its total equity. This will boost the return on equity (RoE). At Wednesday's closing price of Rs 1,526.2, the stock was traded at 24 times its FY18 projected earnings. The valuation looks reasonable given revenue visibility , strong RoE of 20% and robust cash generation.

The company's thrust on R&D and selecting suitable foreign technology partner is crucial in securing future growth in a competitive environment.
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