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Analyst Research Report Snapshot


Bharat Electronics (BHE) - Qtr. Update - Dated - October 29, 2013




Axis Capital Limited


30 Oct 2013





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Bharat Electronics’ execution issues continued in H1FY14 with revenue growth of 4% despite order backlog of Rs 248 bn (4x FY13 sales). Key reason for weak execution is large proportion of long lead projects in the backlog with expected deliveries FY16 onwards. The company reported losses at EBITDA level in H1 (Rs 543 mn) due to negative operating leverage, higher R&D expenses, forex losses (no pass through in 30% of the order book) and execution of low margin orders. However, there was EBITDA breakeven in Q2 which we believe was mainly due to lower raw material cost. Other income declined 28% YoY due to deteriorating cash balance (rising working capital) which led to 23% YoY fall in PAT in H1FY14. Rising working capital cycle: Working capital rose to 13% of revenue as of Sep ’13 from negative in Mar ’13. This is largely due to change in policy by BEL’s key customer (Defense) to ‘payment post milestone achievement’ vs. earlier policy of ‘progressive advance payments’. Also, increase in inventory contributed to rise in working capital. What does H1FY14 imply for H2: Our revenue estimate for FY14 is in line with MoU target of Rs 67.5 bn which implies H2FY14 revenue of Rs 48 bn (up 13% YoY). We remain concerned on margin and expect 120 bps decline in margin in FY14 to factor in adverse mix and weak INR. Management indicated order inflow of Rs 80-100 bn in FY14, which implies Rs 64-84 bn order inflow in H2FY14. We believe there is downside risk to FY14 inflow estimate due to impending elections and high deficit which might result in cut in Defense expenditure. Maintain HOLD with TP of Rs 1,079 (12x FY15E EPS). While valuation appears cheap, we believe the upside will be limited due to margin pressures and deteriorating working capital. At CMP of Rs 1,069 (1% upside) the stock trades at 11x FY14E EPS and 12x FY15E EPS. Regards, Bhavin Vithlani (Executive Director – Power & Cap Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1144 Charanjit Singh (Vice President – Capital Goods) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1123

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