Bharat Electronics Ltd (BEL), a premier defence company

• Market Cap:  27,375 Cr.
• Current Price:  112.30
• 52 weeks High / Low  122.15 / 56.00
• Book Value:  40.44
• Stock P/E: 16.66
• Dividend Yield: 1.25 %
• ROCE: 26.26 %
• ROE: 19.01 %
• Sales Growth (3Yrs): 14.53 %
• Listed on BSE and NSE
• Company Website
• Face Value:  1.00

• PEG Ratio: 1.85
• Promoter holding: 51.14 %
• Pledged percentage: 0.00 %
• Debt:  0.00 Cr.
• Price to Earning: 16.66
• EPS:  6.74
• Net profit:  1,643 Cr.
• Profit growth: -15.83 %
• Profit growth 7Years: 10.93 %
• Net profit preceding 12months: 1,794 Cr.
• Profit growth 3Years: 5.08 %
• Dividend yield: 1.25 %
• Debt to equity: 0.00
• Sales last year:  12,921 Cr.
• Sales growth: 3.36 %
• Unpledged promoter holding: 51.14 %
• Investments:  0.00 Cr.
• Intrinsic Value:  199.62

Bharat Electronics Ltd (BEL), a premier defence company is part of the government (Public Sector Undertaking) which was incorporated in the year 1954. The company has nearly 6 decades of experience in serving the defence needs for Indian arm forces. Started as an association with CSF, France (now, Thales), to manufacture basic communication equipment, BEL is now transformed completely to produces a wide range of state-of-the-art equipment for both in defence and non-defence sector. GOI is the promoter with 51.14% shareholding and HDFC MF has the highest individual shareholding at 5.6%. The company has a marketcap of Rs27,570 crore.

Investment rationale
 

A premier defence player with diversified product offerings: The Company now offers a wide range of equipment in fields such as Defence Communication, Radars, Naval Systems, C4I Systems, Weapon Systems, Homeland Security, Telecom & Broadcast Systems, Electronic Warfare, Tank Electronics, Electro-Optics, Professional Electronic Components, and Solar Photovoltaic Systems. It also undertakes turnkey contracts. The non-defence offerings include Electronic Voting Machines, Tablet PC, solar-powered traffic signal systems, and Access Control Systems.  Starting from a single Unit in Jalahalli, Bangalore, BEL has established its presence across the country by setting up eight other Units – in Ghaziabad, Pune, Machilipatnam, Panchkula, Kotdwara, Navi Mumbai, Chennai, and Hyderabad.
 

High entry barrier, sticky client base: BEL was established to meet the specialized electronic equipment requirements of the Indian Defence Services. While this continues to be its prime focus, the Company has a significant presence in the civilian market, too. BEL exports some of its products and services to the number of countries as well. The product approval process in defence is a long term process and requires a strong product supply track record. BEL has been able to successfully partner as a production agency with many DRDO labs as part of R&D initiatives. The key clients are DRDO, ISRO, Election Commission of India, AIR, DD, National Radio & TV Broadcasters, Instrumentation Industry, Switching Industry, Entertainment Industry, Telephone Industry, Individuals, etc. BEL also has overseas clients which ranging from least developed nations to developed ones.

The company is the largest product partner with DRDO and has filed over 100 patents. BEL is continuously investing 8-10% of its turnover in R&D year-on-year basis. The Company has been investing continuously towards modernization and expansion of its infrastructure to meet its growing business needs. In the next 2-3 years, BEL has planned to invest around Rs. 3000 Crores as part of capacity expansion and modernization of its facilities in line with growth plans. Most of the manufacture of the product by the company is approved after substantial waiting time by the competent authority and hence it serves as a strong entry barrier for new players thus resulting in a sticky client base.
 

Strong order book backed by robust industrial outlooks: The company as on April 2020, has an outstanding order book of close to Rs52,000 crore which is >4x of its FY20 sales and thus offers huge revenue visibility for the near term. The year FY20 witnessed orders inflows worth Rs 13,000 crore, including Akash missiles (seven squadrons), coastal surveillance systems (CSS), upgrade for EW system, radars, AMCs for radars & weapon systems, software-defined radio (SDR), sonars and advanced communication systems. India has the third-largest armed forces in the world. 60% of defence related requirements are met by imports which offer a huge opportunity for import substitution. As per the offset policy, a minimum of 30% for procurement of defence equipment above USD 307.69 million has been envisaged. India is on the verge of rapid modernization of arm forces and thus huge Capex will be incurred. We believe, BEL is expected to be the direct beneficiary of the same. With the advancement of digital technologies and their use in almost all areas, businesses like e-Governance, defence, banking, etc have become vulnerable from cyber attacks, cyber security solution requirements range from Cyber Warfare, Espionage, National Defence, Protection of Intellectual Property, Data Security for employee/customer / personal information are being developed. The global Cyber Security market is expected to reach about USD 190 billion by the year 2025 and the Cyber Security market in India is estimated to be about Rs. 30,000 Crores for the next 3 years. BEL has formed a new business vertical in the year 2017-18 to address Network & Cyber Security business opportunities.
 

Clean balance sheet, strong financial numbers: The company has a debt-free balance sheet with a strong margin (22%) and return (+20%) profiles. The company is expected to be beneficiary due to recent government announcement of indigenous defence production. The stock is currently trading at a 1-Yr forward PE of 16.10x. We recommend BUY.
 

Duration of recommendation: Short to Medium term.