Bharat Electronics: Q4 numbers good; timely execution key to sustaining performance

The stock price of state-owned Bharat Electronics, or BEL, has risen by about 12% in the past month. Analysts continue to be bullish on the stock after its better-than-expected financial performance, especially in the last quarter of FY13.

According to Bloomberg, 60% of analysts have recommended a 'buy' on the stock. The foreign portfolio investor and mutual fund holdings in the company have declined of late, but their stakes could go up if the company manages to maintain a strong execution trajectory in the next few quarters as well.

Led by a robust execution of projects, BEL's revenues in the fourth quarter grew 21% over the past year, while its bottom-line growth was healthy at over 77% supported by a strong operational performance.

A significant contraction of about 700 basis points in raw material costs in relation to sales and a decline of about 100 bps in other expenses compared with the year-ago periodled to a robust expansion in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margins to 21% for the quarter against 14% a year ago.

It's doubtful if the company will be able to sustain such healthy margins, but analysts expect BEL's overall profitability to improve over FY14-FY15, given the higher proportion of high-value defence orders in its order book.

BEL's order book at the end of FY13 was at Rs 25,000 crore, translating into a revenue visibility of about four years. The company expects order inflows of about Rs 6,000 crore in FY14 and has signed a memorandum of understanding with the government for sales of about Rs 6,750 crore in FY14, further bolstering analysts' belief in the company.

The stock is reasonably valued currently, trading at a 12-month P/E of less than 12, at a huge discount to its peak valuations of over 27 a couple of years ago. The stock has corrected by about 25% since mid-2011 due to approval and execution delays, which is typical of defence orders.

While analysts expect the company to come back strongly in FY14, a lot will depend on the smooth and timely execution of the existing order book. The growing participation of private players in defence deals will also be a key determinant for the company's performance going forward.