BUY : Bharat Electronics Limited (BEL)

BUY : Bharat Electronics Limited (BEL): Target Rs. 1725/-, CMP Rs. 1500/-

 BEL, set up to meet specialised electronic needs of Indian defence services, has over the years, grown into multi-product, multi-technology, multi-unit company serving needs of customers in diverse fields in India and abroad.
 Company derives 80% of sales from defence and this ratio is expected to prevail in future as well as both (defence & retail) businesses will grow in line. Being a defence PSU, BEL is likely to be the key beneficiary of substantial increase in defence expenditure. Infact, First time buys (relevant to BEL) - Rs. 234,000 crore, Offset opportunities - Rs. 40,000 crore and upgrades of Mirage & Jaguar fighter planes - Rs. 30,000 crore will open up > Rs. 300,000 crore worth business opportunities over next 10 years for the company and it is confident of capturing > 50% of such opportunities.
 Defence offset, requiring 30% of order to be sub-contracted domestically, to be another booster. BEL’s PSU status makes it a preferred offset partner for many contracts. Accordingly, company is looking at such opportunities in aerospace sector, especially big contract like Medium Multi Role Combat Aircraft. As a result, export order book is expected to swell to US $ 300-500 million (US $ 42.3 million of total export order book of US$ 66.4 million in FY 2011) in next 5 years.
 All the factors mentioned above aptly get reflected in strong order book of Rs. 28,000 crore as on Sep. 30, 2011 (Rs. 23,000 crore at beginning of FY 2012), providing visibility of sales growth of 15% (+) for next 5 years. BEL expects further order inflow of ~ Rs. 5,000 crore in FY 2012.
 Sensing huge business opportunities on high end defence side (eg. Battlefield surveillance, tactical communication, Akash Weapon, etc), company has significantly stepped up R&D spend (grown @ CAGR of 25.7%) in past 4 years (FY 2007-2011) and accounts for ~ 7% of FY 2011 sales. Strengthening of R&D will improve BEL’s ability to remain competitive even as the government opens up defence sector to private players.
 BEL also plans to venture into green field areas like energy sector (Solar, Nuclear), Infrastructure.

Valuation :

 In view of robust order book, steady demand from existing products, enhanced high value product offerings and growth opportunities in civil & export segment, BEL is expected to grow @ CAGR of 15% for next 4-5 years .
 Its cash rich company. As on Sep. 30, 2011, company had cash balance of Rs. 5,875 crore, i.e. > Rs. 734 per share, which is ~ 50% of its current market price.
 At CMP, share is trading at 11.26 times FY 2012 expected EPS of Rs. 133.16 and 10.21 times FY 2013 expected EPS of Rs. 146.98. Considering excellent future prospects, it is an “Excellent Buy from 2-3 years perspective”.