Stock pick of the week: Why analysts are bullish on Bharat Electronics
Analysts believe that Bharat Electronics should perform better in the coming years because of its increased order inflows.
Analysts believe that Bharat Electronics should perform better in the coming years because of its increased order inflows. The company has received orders worth Rs 16,300 crore during 2016-17, taking its order book to an all time high of Rs 40,000 crore—around 4.8-times its 2016-17 revenue. Orders it received in 2016-17 include Electronic Warfare Suite, Hand Held Thermal Imager and 3D Tactical Control Radar.
Being the country’s largest defence electronics equipment manufacturer, Bharat Electronics will also benefit from the shift in the defence equipment from normal hardware to electronic hardware and software. Around 50%-60% of the new capital expenditure by the defence forces are on this segment.
Bharat Electronics also enjoys several economic moats. First, high-end technologies, heavy capital requirements, long gestation periods for order execution, etc. will act as barriers for new entrants. To maintain its competitive edge, the company is planning to increase its R&D spend—developing new products and indigenising imported technologies—from the current 9% to 12% of its sales in the coming years. This is critical because around 25% its revenue will come from the new products.
Second, security and secrecy is of key importance in defence deals and Bharat Electronics’ PSU structure helps it maintain a competitive edge over domestic and foreign competitors. Bharat Electronics has also been able to bag large civilian contracts where too secrecy is of paramount importance— for instance, Electronic Voting Machines.
Third, most of its capital expenditure has already happened, so additional capex requirement is limited. Bharat Electronics’ capex for the next two financial years is just around Rs 1,500 crore and most of it will be funded through operational cash flows. The company is also free from debt and is sitting on a cash pile of Rs 3,900 crore— around 10% its market cap.
As of now, exports only contribute around 5% of its revenues, but Bharat Electronics plan to be aggressive on exports as well. Products that the company is looking to export include Coastal Surveillance System, Advanced Composite Communication System and Ship Borne Early Warning System.
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