Attractive valuation and order book could make Bharat Dynamics shine

ET Intelligence Group: Investors may subscribe to the initial public offer (IPO) of Bharat Dynamics (BDL), a manufacturer of missiles for the Indian defence forces, because of its attractive valuations and a healthy order book. BDL is the first missile manufacturer in the world to list its stock. Hence, some investors say it may attract a scarcity premium. As this is an offer for sale by the government of India, the entire proceeds from the IPO will add to the divestment kitty.

Business model

Headquartered in Hyderabad, BDL is the sole manufacturer of Surface to Air Missiles (SAM), Torpedoes and Anti-Tank Guided Missile (ATGM) in India and a public sector undertaking under the Ministry of Defence. The key offering of the company is Akash SAM and ATGM such as Milan 2T, Konkurs M and INVAR to Indian Army. The total guided missile and torpedo market of India is around $24.49 billion and expected to grow 4.75 per cent a year until 2026, according to Frost and Sullivan. About 80 per cent of the market valuation remains unaddressed and $19.41 billion worth of opportunities will emerge in 2017-26. BDL product offerings are capable of addressing 53.5 per cent of the total market. At the end of January 2018, the company had outstanding order book of Rs 10,543 crore, which is equivalent of twice of the last fiscal year revenues. BDL is the nominated production agency for the Very Short Range Air Defence System, an order worth $5.2 billion.


Financials Snapshot

Revenue rose 30 per cent annually in the past two fiscals to reach Rs 4,832 crore in FY17. Net profit rose 5 per cent annually to Rs 490 crore during the same period. Operating profit grew at 44 per cent to Rs 568 crore between FY15 and FY17. In the first half of the current fiscal, it reported revenue of Rs 1,806 crore and Rs 172 crore of net profit.

Bharat Dynamics IPO

Typically, more than 60 per cent of the company’s revenue is realised in the second half of the fiscal year.

Risk Factors

The company is dependent on just one customer. It derived 98 per cent of its revenues in the first half of FY18 from the Indian armed forces. The change in technology, alteration in the programme or procurement methodology by Indian armed forces could affect the revenues of the company. It has also has been paying damages of 5-10 per cent of contract values due to late delivery in the past three fiscal years.

Valuation

At the higher end of the price band of Rs 428, the company is valued at 16 times its FY17 earnings and 22 times of annualized earnings of the first half of FY18. The company has no listed peers in the manufacturing of missiles. However listed defence suppliers such as Bharat Electronics, Astra Microwave and Apollo Micro System are trading in the range of 13 and 40 times of their annualized earnings of FY18. In addition, BDL offers a superior return ratio compared with listed defence suppliers. The company had Return on Equity (RoE) of 26.8 per cent, 30.4 per cent and 22.2 per cent in the past three fiscal years.