Bharat Electronics (BEL) Continues to Impress with 9% YoY Revenue Growth and 150bps YoY Autonomous EBITDA Margin Expansion for FY21 – a Year with a T1FY21 almost lost (revenue was down 20% year-on-year in Q1 21) due to the pandemic. There was a release of working capital of Rs 23 billion for FY21, driven by Rs 28 billion of working capital H2FY21 – another remarkable statistic. To add to the achievements, the order acquired was Rs 152 billion (~ Rs 54 billion for T4FY21), thus maintaining a healthy order book of 3.9x on the FY21e (stand-alone) topline of ~ Rs 140 billion. BEL’s performance continues to stand out (execution + margin + visibility of the order book) within the listed DPSU space. We continue to hold Buy with a revised target price of Rs 177 (Rs 153 earlier).

Influx of FY21 orders at Rs 152 billion: The FY22 order pipeline is also quite visible with ~ Rs 125 billion of orders for BDL missiles and Rs 380 billion of LCA Mk1A orders at HAL. Q4FY21 has seen Rs 10 billion influx of software-defined radio commands (tactics) for the Indian Navy. The opportunity for SDR is also significant with BEL already providing the SDR (Naval Combat) version and SDR-Air being under evaluation.

Short-term ordering opportunities: BEL has already taken into account the execution of the avionics related to the LCA Mk 2 because HAL has received a LoI for the same. Future opportunities include Jammer for LCA. In addition, LUH and LCH (helicopters) could enable sensors and weapons to significantly increase BEL’s avionics revenue.

Responsibility will fall on diversification and execution: BEL objectives: (i) increase the civilian segment from 7% of turnover to 15% in the next 2-3 years; (ii) increase the current contribution by 10% to the revenues of the service sector; (iii) capture a share of the Armed Forces revenue expenditure budget through entry into electronic fuses and RF homers (new complex at Machilipatnam which will be commissioned soon); and (iv) gain shares in the core business, i.e. integration of the missile complex (Palasamudram; another separate SBU for QRSAM in Bengaluru), entry into ammunition, etc. Diversification outside of defense activities is essential to obtain medium-term visibility on double single-digit revenue growth.

Maintaining the PURCHASE: we estimate BEL at 17 times the profit for fiscal 23rd (vs. 15x fiscal 22nd earlier). We are maintaining Buy with a revised TP of Rs 177 / share. BEL continues to surprise in terms of execution, margins, new orders, growth despite having reached a commendable scale (relative to the Indian defense budget) – The performance of FY21 puts highlight the strength of the underlying business model.