Strong order book to stand defence major Bharat Electronics in good stead

A robust margin performance in the September quarter (Q2FY25) led to a 12 per cent rise in the stock of defence major Bharat Electronics (BEL).

While the stock has given up most of those gains in the recent market correction, analysts are positive on the company due to its strong order book, new order inflows, and margin trajectory.

The near-term trigger has been the operating performance in Q2FY25.

The company’s revenue went up by 14.8 per cent to Rs 4,605 crore, in line with the estimates.

This was driven by a robust order book of Rs 74,595 crore and an inflow of Rs 7,400 crore during the first half of FY25.

Better execution helped the company offset some of the supply chain issues from Israel.

The margin performance exceeded expectations.

The company’s gross margins at 53.3 per cent improved 450 basis points year on year (Y-o-Y) and 780 basis points on a sequential basis, largely due to an improved product mix.

Gross margins were much higher than the guided range of 40-42 per cent. Riding on higher gross margins the company’s operating profit margins came in at a healthy 30.4 per cent, up 510 basis points Y-o-Y.

The Street was working with a range of 23-24 per cent.

The company has retained its topline growth guidance of 15 per cent in FY25 and expects a 15-17.5 per cent growth in the coming five years, expected to be led by defence, exports, and services.

Maintaining the guidance indicates a pick-up in order inflow and reversal of margin trends, points out Kotak Institutional Equities.

Analysts led by Deepak Krishnan of the brokerage said that the ability to sustain margins at these elevated levels remains the key long-term concern.

The brokerage has retained its ‘sell’ rating with a target price of Rs 230.

A key trigger for the stock going ahead would be the strong order book at Rs 74,595 crore which was aided by the order inflows of Rs 2,600 crore in the September quarter.

The order book translates into 3.6 times its trailing twelve months' sales, thus offering strong revenue visibility.

The company has guided for order inflows of Rs 25,000 crore for FY25 and FY26 and these exclude orders for quick-reaction surface-to-air missiles (QRSAMs).

The company’s overall order inflows for FY26/27 are expected to be around the Rs 75,000 crore mark.

Motilal Oswal Research expects defence ordering to start ramping up in the coming quarters.

Analysts led by Teena Virmani of the brokerage expect BEL to remain a key beneficiary with key focus areas being naval, electronic warfare systems, artillery systems, platform orders, Kavach, and exports, among others.

They peg the revenue growth at 19 per cent over FY24-27, led by improved market share on account of enhanced wallet share and improved indigenised offerings.

They have a ‘buy’ rating on the company with a target price of Rs 360.

Sharekhan Research too has a ‘buy’ rating on the stock.

The brokerage says BEL boasts a promising order inflow pipeline, strong cash balance, and healthy return ratios, and a strong Q2 makes it factor in 16 per cent growth each for revenue and net profit over FY24-27 with a target price of Rs 380.

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