Religare Investment Call

Transcription

1 Ltd. BUY CMP (Rs) Target Price (Rs) Potential Upside Sensex Nifty Key Stock data BSE Code NSE Code Bloomberg Shares o/s, Cr (FV 1) Market Cap (Rs Cr) 3M Avg Volume 52 week H/L Shareholding Pattern (%) Promoter FII DII Others Mar Jun Year relative price performance Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Jul17 Aug % 33,478 1, BEL BHE:IN ,624 3,75, 192/19 Sep17 Sep Oct17 Nov17 An indigenous defence play Ltd. (BEL), a Navratna company, was established in 1954 to meet the specialized electronic equipment requirements of the Indian Services. BEL has two business segments namely, and Civilian business. It has 8 manufacturing units spread across the country. Investment rationale Favorable policy changes by the government in the defence sector in last three years augur well for BEL as 88% of its revenue comes from the defence segment. BEL has shown consistent growth over last 5 years, despite muted growth in defence capex. We expect higher defence capex in coming years post completion of OROP and seventh pay commission implementation. BEL would be a key beneficiary of higher defence capex and favorable policy changes implemented by the government. BEL's order book has almost doubled in FY17 to ~Rs. 4,Cr (4.7x TTM Sales) which provides great revenue visibility for next three years. The jump in order book was led by large orders like IACCS (Integrated Air Command and Control System) and Advanced composite communication systems. Management remains optimistic of receiving order inflow of Rs. 13,Cr15,Cr per year over next three years. We expect order book to grow at 8% CAGR over FY17FY2E backed by higher defence capex and pick up in export order book. We expect BEL to retain its leadership position in the defence electronics space due to a) increase in R&D investment to 1% of Sales (Currently 8.8%) to develop new products b) Its strong relations with DRDO (largest production partner of DRDO) c) Highly skilled Staff ~48% of their overall employees are scientist/engineers. d) High vendor base of 14,362 (11,111 Indian and 3,251 Foreign). Outlook & Valuation BEL is well placed to benefit from Government's greater emphasis on 'Make in India' initiative in sector and provide great opportunity to enhance its indigenization efforts. BEL is also expected to reap benefits from higher defence capex in the coming years. Over the next three years, BEL provides high visibility on revenue due to its healthy order book of ~Rs. 4,Cr (4.7x TTM Sales) and order inflows to the tune of Rs. 13,Cr 15,Cr per year. BEL's thrust to increase focus on R&D to innovate and modernize defence equipment will support to retain its leadership position. Exports are expected to aid future growth for the company, as the management aims at doubling exports share of revenue to 1% in the long run. We expect BEL s Sales/EBITDA/PAT to grow at CAGR of 15.5%/15.1%/11% over FY17FY2E. We recommend a Buy on the stock with a target price of Rs. 217 per share with time frame of 1215 months. Research Analyst Rohit Khatri, MBA rohit.khatri@religare.com November 22, 217 BEL Ni y 5 Financial Summary Particulars, Rs cr Net revenue EBITDA EBITDAM (%) APAT APATM (%) EPS (Rs) PE (x) RoE (%) FY17 FY18E FY19E FY2E 8,612 9,998 11,527 13,26 1,761 1,936 2,34 2, ,559 1,599 1,844 2,

2 Investment rationale India V/s the World India s defence spend is the 5th highest in the world India accounts for 3.3% of the world's defence industry Globally, 3 nations accounts for 89% of the world's total spending on national defence. Within the top 3 nations, five nations the US, China, Russia, Saudi Arabia and India generate 6% of defence spending. The worlds defence industry amounts to USD 1.6 trillion with India's share at 3.3% in 216 up from 2% in 26. Over the last decade, India's defence spend has grown at CAGR of 9.9% (second only to China among top 1 countries) to USD 56 billion and has become 5th highest defence spender in the world from 11th highest defence spender a decade ago. Budget (USD bn) USA China Russia Saudi Arabia India France UK Japan Germany South Korea Budget (USD Billion) Source : SIPRI; RSL Research Low defence spend as a % to GDP gives scope for higher allocation to defence budget in the future However, spend as percentage of GDP still low India's defence spending as a percentage of GDP has been flat over the last decade at 2.5% of GDP. In contrast, defence spend of other high spending countries (Saudi Arabia, Russia) has been rising during the same period. On the other hand, USA (top spender on an absolute basis) and China has seen a decline in defence spend as a percentage to GDP. as a % of GDP 12.% 1.% 8.% 6.% 7.8% 1.4% 5.3% 4.% 2.% 3.8% 3.3% 2.% 1.9% 2.5% 2.5% 3.5%.% USA China India Saudi Arabia Russia CY6 CY16 Source : SIPRI; RSL Research

3 Largest share in Global Imports of Arms India imports 6% of its defence requirements... India has one of the largest Industrial complexes in the developing world consisting of 39 ordinance factories, 9 defence public sector undertakings (DPSU) under the control of Ministry of (MoD). Despite this, India is dependent on imports for defence arms and equipment. Imports accounts for 6% of India s defence requirements and according to Stockholm International Peace Research Institute (SIPRI), India with 13% share in global arms import was the single largest arms importer in the world during Revenue mix for FY India Saudi Arabia UAE China Algeria Turkey Australia Iraq Pakistan Vietnam Global Import Share (%) Source : SIPRI; RSL Research...hence government has increased focus on boosting domestic defence manufacturing Government Fiscal and Policy initiatives to reduce import dependency In order to reduce import dependency and improve selfreliance, GOI has introduced various policy measures to boost defence production in India. production has been one of the key focus sectors in Prime Minister Modi's Make in India initiative. Key Policy Measures by the Government FDI opened to 1% Buy Indian IDDM Buy and make (Indian) Make Procedure Offset Policy Industrial Licensing Special focus on MSME In order to boost foreign investment, 1% FDI is allowed in defence sector, out of which up to 49% is under automatic route. FDI above 49% is permitted through Government route on case to case basis where it is likely to result in access to modern technology. A new category of procurement Buy {IndianIDDM (Indigenously Designed, Developed and Manufactured)} has been introduced in Procurement Procedure216 and the same has been accorded top most priority for procurement of capital equipment. Indian companies are allowed for tieups with a foreign Original Equipment Manufacturer (OEM) for Transfer of Technology (ToT) under Buy & Make (Indian) category. The Make Procedure has been simplified with provisions for funding of 9 % of development cost by the government to Indian industry and reserving projects not exceeding development cost of Rs. 1 crore (government funded) and Rs. 3 crore (industry funded) for MSMEs. The offset policy in capital purchase contracts with foreign defence OEMs, stipulates a mandatory offset requirement of a minimum of 3% for defence contracts. The minimum contract value for which offsets are mandatory has now been revised from INR 3 crore to INR 2, crore. Large number of parts/components, castings/ forgings etc. have been excluded from the purview of industrial licensing In the Make category of capital acquisition, government funded projects with estimated cost of prototype development phase not exceeding INR 1 crore and industry funded projects with estimated cost of prototype development phase not exceeding INR 3 crore are reserved for MSMEs

4 Higher allocation towards Capex capital expenditure allocation to increase to 34% of overall defence budget by FY2 India's defence budget has grown at 6.1% CAGR over FY14FY18 mainly driven by an increase in revenue expenditure which has grown at 8.5% CAGR in the last 5 years. The growth in revenue expenditure was to accommodate higher pensions due to OROP scheme and implementation of the seventh pay commission. On the other hand, defence capex has grown at meager CAGR of 1.86% over FY14FY18 and there was no increase in defence capex in FY18 and was kept at Rs. 86,488 cr. The capital expenditure allocation is also at the lowest point in FY18 at 32% of the overall defence budget. However, it is interesting to note that the capital expenditure of Rs.1,75,42 cr was incurred on items in FY15, FY16, FY17 (upto December 216) out of which Capital expenditure of ~Rs.1,5,3 Cr was incurred on purchase from Indian vendors implying higher preference being given to Indian manufacturers. Moreover, the unspent amount returned to Government went down from Rs. 13, Cr in FY16 to Rs. 6,97 Cr in FY17, which indicates that more projects are being planned and completed. India s Budget (Rs. cr) India s Budget Allocation (%) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY2E 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 6% 56% 61% 63% 62% 67% 68% 67% 66% 4% 44% 39% 37% 38% 33% 32% 33% 34% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19EFY2E Capital Expediture Revenue Expenditure Total Budget Revenue Expenditure Capital Expediture Going forward, we expect defence capex to grow at faster pace mainly on account of government's increased thrust towards Make in India and completion of OROP and Seventh Pay Commission implementation. capital expenditure is likely to grow at 12% CAGR over FY18FY2E. The allocation towards capital expenditure is expected to increase to 34% in FY2E as against 32% in FY18. BEL most likely to benefit from government policies and higher allocation to defence Capex BEL to benefit from higher defence capex and favorable policies Since the launch of Make in India, BEL has taken several initiatives in support to the policy such as a) a total of 7 items have been identified for indigenization, b) Procurement from MSEs has increased to 2% as of FY17, c) Focus more on R&D through collaborative research d) Outsourcing noncore items through private sector to achieve cost benefits. We believe BEL is likely to benefit from higher capital expenditure in defence, government's increased focus on Make in India policy and company's indigenization efforts.

5 Healthy Order Book provides greater visibility BEL order book to grow at 8% CAGR over FY17FY2E BEL order book growth was sluggish over FY13FY15 on the back of flat growth in defence capex budget. However, the order book of BEL almost doubled in FY17 to Rs. 4,212cr from Rs. 21,617cr in FY15 increasing its revenue visibility substantially to 4.7x TTM Sales. Management expects order inflow between Rs. 13,cr Rs. 15,cr in FY18 and believes that the same trend should continue over the next three years. BEL is also pursuing business opportunities in Space Electronics, Solar Energy, Homeland Security, Smart Cards and Telecom which could aid higher order inflows. The order book as on Q2FY18 stands at Rs. 41,746 cr. We expect order book to grow at 8% CAGR over FY18EFY2E. BEL's bookbill ratio has been volatile over the last seven years due to irregularity in order inflows. However, current booktobill ratio 1.93x entails strong demand for BEL products. BEL s Order Book Order Inflow vs Book to Bill Ratio 45, 4, 35, 3, 25, 2, 15, 1, 5, FY12 FY13 FY14 FY15 FY16 FY17 6% 5% 4% 3% 2% 1% % 1% 2% FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY Order Book (Rs. cr)lhs Yoy Growth (%)RHS Order Inflows (Rs Cr)LHS Book to Bill Ra o (x)rhs BEL has executed some large orders in the last three years Major Orders Executed Akash Weapon System Passive Night Vision Devices 3D Tactical Control Radar Missile Warning System Schilka Gun Tank Upgrade Laser Range Finder Hull Mounted Sonar Shipborne EW System (Sanket) Fire Control Systems Electronic Voting Machines Akash Weapon System (Army & Air Force) 3D Tactical Control Radar to Army Schilka Upgrade to Army Passive Night Vision Devices to Army Low Level Light Weight Radar to Air Force Fire Control System to Navy Integrated Sonar Suite to Navy Ship Data Network to Navy New Generation Sonars to Navy L Band Surveillance Radar for Export (Myanmar) Akash Weapon System Fire Control System L7 Gun Upgrade Integrated Air Command & L7 Gun Upgrade Control System Low Level Transportable Radar 3D Tactical Control Radar Radio Relay Frequency (LB) HHTI with LRF Some of the major orders expected in FY18 are Long Range Surface to Air Missile (LRSAM), Akash for Airforce, Commander TI sights for BMP, Mobile Cellular Communication System Fire Control System (Lynx U1 MOD), Low Intensity Conflict EW System and Electronic Fuze.

6 High R&D Spending to spur growth High focus on R&D would help BEL retain its leadership position BEL has a three tier structure for Research & Development two centers each for Central Research Lab, Central Design Group and 2 Development centers. BEL added 18 Collaborative Research and Development partners in FY17, taking its total count of Collaborative Research to 193. In FY17, BEL invested 8.8% of its revenue (Rs.777cr) in R&D, and over FY13FY17 R&D investment has grown at a CAGR of 11% and 8% as percent to sales. Its constant effort with DRDO ( Research and Development Organization) on indigenous development has resulted it to achieve 87% of its turnover from indigenous products. Some of the key products introduced in FY17 are Hull Mounted Sonar (New Generation), Submarine Sonar Suite (USHUS 2), Battle Field Surveillance System XRShip Based EW System (Varuna) Battle, Advanced Composite Communication System, Weapon Locating Radar and Missile Two Way Data Link. R&D Expense vs R&D Expense as percent to sales No. of Employees vs % of Scientists/Engineers FY13 FY14 FY15 FY16 FY17 R&D Expense (Rs. Cr)LHS 1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% R&D Expense as a % to SalesRHS % 5% 4% 3% 2% 1% % FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 No. of EmployeesLHS % of Scien sts/engineersrhs BEL intends to increase its R&D investment to 1% of sales in coming years in order to retain its leadership position in strategic electronics and have technological edge over its competitors. Despite rising competition from private players, we expect BEL to outperform its competitors mainly on account of a) Its strong relations with DRDO (largest production partner of DRDO) b) Highly skilled Staff ~48% of their overall employees are scientists/engineers c) Higher allocation (1%) towards Research and Development d) High vendor base of 14,362 (11,111 Indian and 3,251 Foreign).

7 Exports to pick up in future BEL's export has grown at strong CAGR of 18% over FY13FY17 led by tieups with foreign OEMs to cater to their offset obligations, exports of indigenously developed products such as electronic voting machines, national surveillance radars and communication equipment. BEL exports its products to major countries like USA, UK, Russia, Italy, Myanmar, Brazil, Germany, France, Israel, Indonesia, Honduras, Malaysia, Maldives, Mauritius, and South Africa. BEL s long term plan is to reach sustained export sales to total sales turnover ratio of 1% from the current level of 4.9%. Exports (Rs Cr) vs Export as percent to sales Management targets to increase export share of revenue to 1% in the long run FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 8% 7% 6% 5% 4% 3% 2% 1% % Exports (Rs. Cr)LHS % of SalesRHS We expect BEL export sales to grow at 18% CAGR FY17FY2E led by its order book of USD 85 million (Rs. 565cr) and company's export initiatives like Strategic alliances with global OEMs (Elbit, IAI, Thales, SAAB) for joint development / coproduction and focus on SE Asian Countries for Sonars and Coastal Security solutions.

8 Financial Analysis Revenue to grow at 15.6% CAGR over FY17FY2E Strong order book of BEL gives higher revenue visibility BEL's revenue grew by 17.5% in FY17 on back of strong order inflows in FY16FY17 of ~Rs. 35, cr. This was mainly on the back of large orders like IACCS (Integrated Air Command and Control System), and Advanced composite communication systems received by the company over FY16FY17. As of FY17, BEL had a strong order book of Rs. 4,212cr which will help drive sales at CAGR of 15.5% over FY18EFY2E. Net sales (Rs Cr) 16, 14, 12, 1, 8, 6, 4, 2, FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E Net Sales (Rs. Cr) EBITDA margin to shrink by12bps temporarily in FY18E EBITDA Margin to improve in FY19 to ~2% BEL's EBITDA margin has improved significantly over FY13FY17 from 1.5% in FY13 to 2.5% FY17 as the company transformed itself from a product manufacturing company to a one that takes the contract as a system integrator. Though this has improved margin for the company, we expect EBITDA margin to decline by 11bps in FY18E due to increase in employee cost due to Seventh pay commission hike. After FY18, we expect margin to be ~2% over FY19E and FY2E. EBITDA Margin (%) 3, 2,5 2, 1,5 1, 5 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E EBITDALHS EBITDA Margin (%)RHS

9 PAT growth of 11%CAGR over FY172E Net profit margin to stabilize at 16% due to higher capex and tax rate BEL's Net Profit grew at 13.4% CAGR over FY13FY17 on consistent sales growth and improved margins. PAT margin improved from 14.7% in FY13 to 18.1% in FY17. We expect Net Profit margin to be ~16% over FY18EFY2E largely due to higher capex leading to higher depreciation cost and higher tax rate due to reduced tax benefit from research and development. We expect Net profit to report 11% CAGR over FY17FY2E. PAT (Rs. Cr) vs PAT Margin (%) 2,5 2, 1,5 1, 5 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY2E 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % PATLHS PAT Margin (%)RHS

10 Company background Ltd. (BEL), a Navratna company, was established by the Government of India in 1954 under the ministry of to meet the specialized electronic equipment requirements of the Indian Services. Over the years, BEL has transformed itself from a product manufacturing company to a one that takes the contract as a system integrator. Currently, 87% of its products manufactured by BEL are indigenous products. BEL manufactures a wide range of stateoftheart equipment in fields such as Communication, Radars, Naval Systems, C4I Systems, Weapon Systems, Homeland Security, Telecom & Broadcast Systems, Electronic Warfare, Tank Electronics etc. It has a significant presence in the civilian market manufacturing products such as Electronic Voting Machines, Tablet PC, solarpowered traffic signal systems and Access Control Systems. It also provides services like contract manufacturing and design manufacturing. BEL started from a single unit in Bangalore, but has established its presence across the country by setting 8 other units in Ghaziabad, Pune, Machilipatnam, Panchkula, Kotdwara, Navi Mumbai, Chennai and Hyderabad. Each of the 8 units has a specific product mix and customer focus. BEL has two business segments namely and Civilian business. business constitutes major part of its revenues with sole customer in India (GOI). BEL also exports its defence products to friendly countries like USA, UK, Russia, Italy, Myanmar, Brazil, Germany, France, Israel, Indonesia, Honduras, Malaysia, Maldives, Mauritius, Namibia, Seychelles and South Africa. Business Segments (%) Sales Breakup (%) 12% 5% 88% 95% Business Civillian Business Domes c Sales (%) Export Sales (%) Risks Slowdown in order Inflow: industry is monopsony market wherein government is the only buyer for BEL's products and services. Although, BEL is looking to diversify its business to nondefence products like homeland security, solar panels, smart card and space electronics, we believe slowdown in orders from government due to lack of funds could have adverse effects on BEL's revenue forecasts. Increased competition from private/foreign players: The government has shown increased interest in private/foreign players for procurement of defence products. Several policies have been announced in order to boost investment in defence like FDI in defence increased to 1%. Government has also introduced Strategic Partnership model for broader participation of private sector and also to enhance the capacities in major defence platform manufacturing in addition to DPSUs. However we believe BEL has distinct advantage in the medium term due to its relations with DRDO, increased investment in R&D to innovate and modernize new arms and equipment.

11 P&L Account consolidated Particulars, Rs cr FY17E FY18EE FY19E Net sales Expenditure Employee cost Raw material consumed Purchase of stock in trade Other expenses Total expenditure EBITDA EBITDAM (%) Other income Depreciation PBIT Interest expenses PBT Tax Reported profit PATM (%) 8, , , ,85.4 1, ,41. 2, , , , , ,12. 8,62.3 1, ,13.4 2, , , ,68. 5, , , , , , , FY2E 13,26. 2, , , , , ,84.5 2, , Balance sheet consolidated Particulars, Rs cr FY17P FY18EE FY19E Share Capital Reserves & Surplus Total Shareholder's Fund NonCurrent Liabilities Long term borrowings Other long term liabilities Deferred tax liabilities Long term provision Current Liabilities Trade payables Short term provisions Other current liabilities Total liabilities Fixed Assets Current work in process Non current investment Other noncurrent assets Long term loans and advances , , , , , , , , , , ,71.6 1, , , , , , , FY2E , , ,42.4 3, , ,32.2 2, Current Assets Current investments Inventories 4, , , ,58.1 Trade receivables 4, ,74.9 5, ,733.6 Cash & Cash equivalents 2,686. 3,41.7 4,15.9 5,162.1 Short term loans and advances 1, , , ,774.3 Other current assets ,93.9 Total assets 8, ,54.2 1, ,754.9

12 Cash Flow statement consolidated Particulars, Rs cr FY17P FY18EE FY19E Profit before tax Add: Depreciation Add: Interest cost Others Operating profit before working capital changes Changes in working capital Direct taxes Cash flow from operating activities Net cash used in Investing Activities Purchase of fixed assets Others Cash flow from investing activities Cash flow from Financing Activities Proceeds from issuance of shares Net proceeds from borrowings Dividend (Incl dividend tax) Interest cost Others Cash flow from Financing Activities Net cash Inflow/Outflow Opening Cash & Cash Equivalents Closing Cash & Cash Equivalents 2, , , , , , , ,47.1 2,686. 2, , ,686. 3,43 2, , ,43.1 4,152 FY2E 2, , ,11.2 4, ,163 Key Financial ratios consolidated Particulars, Rs cr FY17P FY18EE FY19E Dividend per share Rs Dividend Yield (%) Payout (%) EPS Rs Book value per share Rs Profitability Ratios EBITDA/Total Income (%) PBT/ Total Income (%) NPM/ Total Income (%) RoCE (%) RoE (%) Liquidity Ratios DebtEquity Ratio Current ratio Turnover Ratios Total Asset Ratio Fixed Asset Ratio Debotors Velocity (Days) Inventory (Days) FY2E

13 Before you use this research report, please ensure to go through thedisclosure interalia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 214 and Research Disclaimer at the following link : Specific analyst(s) specific disclosure(s) interalia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 214 is/are as under: Statements on ownership and material conflicts of interest, compensation Research Analyst (RA) [Please note that only in case of multiple RAs, if in the event answers differ interse between the RAs, then RA specific answer with respect to questions under F (a) to F(j) below, are given separately] S. No. Statement Answer Tick appropriate YES I/we or any of my/our relative has any financial interest in the subject company? [If answer is yes, nature of Interestis given below this table] I/we or any of my/our relatives, have actual/beneficial ownership of one per cent. or more securities of the subject company, at the end of the month immediately preceding the date of publication of the research report or date of the public appearance? I / we or any of my/our relative, has any other material conflict of interest at the time of publication of the research report or at the time of public appearance? I/we have received any compensation from the subject company in the past twelve months? I/we have managed or comanaged public offering of securities for the subject company in the past twelve months? I/we have received any compensation for brokerage services from the subject company in the past twelve months? I/we have received any compensation for products or services other than brokerage services from the subject company in the past twelve months? I/we have received any compensation or other benefits from the subject company or third party in connection with the research report? I/we have served as an officer, director or employee of the subject company? I/we have been engaged in market making activity for the subject company? Nature of Interest ( if answer to F (a) aboveis Yes :... Name(s)with Signature(s)of RA(s). [Please note that only in case of multiple RAs andif the answers differ interse between the RAs, then RA specific answer with respect to questions under F (a) to F(j) above, are given below] SS.No Name(s) of RA Signatures of RA Serial Question of question which the signing RA needs to make separate declaration / answer YES Copyright in this document vests exclusively with RSL. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose, without prior written permission from RSL. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Disclaimer: