BUY BHARAT ELECTRONICS LTD. CMP Target Price June 18 th, 2013 SYNOPSIS. Result Update: Q4 FY13

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1 R BUY CMP Target Price BHARAT ELECTRONICS LIMITED Result Update: Q4 FY13 June 18 th, 2013 ISIN: INE263A01016 Stock Data Sector Defence BSE Code Face Value wk. High / Low (Rs.) / Volume (2wk. Avg ) Market Cap ( Rs in mn ) Annual Estimated Results (A*: Actual / E*: Estimated) Years FY13A FY14E FY15E Net Sales EBITDA Net Profit EPS P/E Shareholding Pattern (%) SYNOPSIS Bharat Electronics Limited (BEL) manufactures and supplies electronic products primarily to defense services in India. BEL has signed a MoU with TCOM, USA, for co-operation on developing advanced aerostat surveillance and communication systems to address the ISR requirements of the Indian armed forces. During the quarter, the company posted standalone Net Profit is increased by 77.54% to Rs million. BEL expected order intake of Rs 6,000 8,000 cr in FY14E and order booking expected to improve with Rs 18,000cr of order pipeline in the short term. 1 Year Comparative Graph Bharat Electronics has recommended a final dividend of Rs per share for the year BSE SENSEX BHARAT ELECTRONICS LTD BEL has registered a record turnover of Rs. 6,010 crores (provisional) for the last fiscal with a growth of 5 per cent over the turnover of Rs. 5,704 crores during Net Sales and PAT of the company are expected to grow at a CAGR of 7% and 7% over 2012 to 2015E respectively. Peer Groups CMP Market Cap EPS P/E (x) P/BV(x) Dividend Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) Bharat Electronics Ltd Cummins India Ltd Pipavav Defence and Offshore Eng Ltd KEC International Ltd

2 Investment Highlights STANDALONE Results updates- Q4 FY13, The company s net profit jumps to Rs million against Rs million in the corresponding quarter ending of previous year, an increase of 77.54%. Revenue for the quarter rose 20.93% to Rs million from Rs million, when compared with the prior year period. Reported earnings per share of the company stood at Rs a share during the quarter, registering 77.54% increase over previous year period. Profit before interest, depreciation and tax is Rs millions as against Rs millions in the corresponding period of the previous year. Months Mar-13 Mar-12 % Change Net Sales PAT EPS EBITDA Expenditure : Break up of Expenditure Rs. millions Q4 FY13 Q4 FY12 Cost of Materials consumed Employees Benefit Expenses Other Expenditure Purchases of Stock-in-Trade Depreciation & Amortization Total Expenditure

3 Latest Updates Bharat Electronics Ltd has recommended a final dividend of Rs per share for the year This is in addition to the interim dividend of Rs. 6 per share for the year paid in Feb Bharat Electronics Limited has ended the year with Rs. 6,010 crore turnover. BEL registered a record turnover of Rs. 6,010 crores (provisional) for the last fiscal with a growth of 5 per cent over the turnover of Rs.5,704 crores during Bharat Electronics Limited has signed a MoU with TCOM, USA, for co-operation on developing advanced aerostat surveillance and communication systems to address the Intelligence Surveillance and Reconnaissance (ISR) requirements of the Indian armed forces. The Company has achieved exports of US $35 million. With a healthy order book of around Rs. 25,000 crores, the Company is all set to continue its good run in the next financial year. The joint venture with Thales is in the approval stage and it s expecting good offset opportunity from the MMRCA deal. The general trend of 80-85% of revenue from defence business to continue going forward, BEL currently has ~65% market share in strategic defence electronics in the domestic market. Bharat Electronics Ltd has informed that ICRA has reaffirmed the following credit ratings of the Company for the year : Long-term rating of [ICRA] AAA to Rs. 200 crores fund based bank limits. Short-term rating of [ICRA] A1+ to Rs crores non-fund based bank limits. Short-term rating of [ICRA] A1+ to Rs. 5 crores short-term debt programme. Outlook for The Company has signed MoU for Rs Crs (Turnover) for the year The Company expected order intake of Rs 6,000 8,000 cr in FY14E and order booking expected to improve with Rs 18,000cr of order pipeline in the near term and a long term order pipeline of Rs 40,000 50,000cr including big ticket orders like Tactical Communication System (TCS) and Battlefield Management System (BMS). Major orders expected during : Weapon Locating Radar

4 Missile Warning System Mobile Cellular Communication System Passive Night Vision Devices Hand Held Thermal Imager with Laser Range Finder Major projects planned for execution during : Akash Missile System (6 Sqdn) Akash Missile System (Army) 3D Tactical Control Radar Low Level Light Weight Radar Shipborne EW System Missile Warning System Upgradation of Schilka Central Acquisition Radar Passive Night Vision Devices Low Intensity Conflict Electronic Warfare system Mast for Long Range Reconnaissance and Observation System Company Profile Bharat Electronics Limited manufactures and supplies electronic products primarily to defense services in India. Bharat Electronics Limited serves customers primarily in army, navy, air force, coast guard, defense PSUs, paramilitary, ministry of home affairs, ministry of rural development, and others. It also exports its products to various countries. The company was founded in 1954 and is based in Bengaluru, India. Its products include receivers, transceivers, encryption products, radio relays, military switching and network products, data communication products, shelterized multilayer military communication network, and strategic communication systems; land-based radars, such as surveillance, fire control, weapon locating, and secondary surveillance radars; naval systems, including radar, sonar, fire control, and naval communication systems; and radar ESM systems, ELINT/COMINT/SIGINT systems, jammers, and integrated electronic warfare systems. The company also offers avionics, laser range finders, night vision devices, weapon sights, and tank and armored fighting vehicle electronic systems, weapon systems, C4I systems, shelters and masts, simulators, and batteries. In addition, it provides e-governance systems; homeland security products, such as perimeter intrusion detection systems, surveillance systems, access control systems, jammers, and X-ray baggage inspection systems; doppler weather radars; solar cells, photo voltaic modules, lanterns, home and street lighting systems, photo voltaic power plants, and traffic management systems; electronic components; & telecom and broadcast systems.

5 Further, the company offers electronic manufacturing services in the areas of PCB assembly and testing, precision machining and fabrication, opto electronics components and assemblies, microwave integrated circuit assemblies, super components modules, cable assemblies and wiring harnesses, and antennae, as well as professional grade transformers, coils, and sub-assemblies. Company adopted the Total Quality Management (TQM) philosophy in the year 1990 under the acronym TORQUE which stands for Total Organisational QualityEnhancement. The subsidiary companies are BEL Optronics Devices Ltd and joint venture companies, GE BE Pvt Ltd & BEL Multitone Pvt Ltd.

6 Financial Highlight STANDALONE Balance sheet as at March31, E (A*- Actual, E* -Estimations & Rs. In Millions) Particulars March (Rs.in.mn) FY12A FY13A FY14E FY15E SOURCES OF FUNDS Shareholder's Funds Share Capital Reserves and Surplus Sub Total - Net worth Government grants Non Current Liabilities Long Term Borrowing Other Long Term Liabilities Long Term Provisions Sub Total - Non Current Liabilities Current Liabilities Trade Payables Other Current Liabilities Short Term Provisions Sub Total - Current Liabilities Total Liabilities ( ) APPLICATION OF FUNDS Non-Current Assets Fixed Assets Tangible assets Intangible assets Capital Work in Progress Intangible assets under development a) Sub Total - Fixed Assets b) Deferred Tax Asset c) Non-current investments d) Long Term loans and advances f) Other non-current assets Sub Total - Non Current Assets Current Assets Inventories Trade receivables Cash and Bank Balances Short-terms loans & advances Other current assets Sub Total - Current Assets Total Assets (1+2)

7 Annual Profit & Loss Statement for the period of 2012 to 2015E Value(Rs.in.mn) FY12A FY13A FY14E FY15E Description 12m 12m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Reserves Face value EPS Quarterly Profit & Loss Statement for the period of 30 th Sep, 2012 to 30 th June, 2013E Value(Rs.in.mn) 30-Sep Dec Mar Jun-13E Description 3m 3m 3m 3m Net sales Other income Total Income Expenditure Operating profit Interest Gross profit Depreciation Profit Before Tax Tax Net Profit Equity capital Face value EPS

8 Ratio Analysis Particulars FY12A FY13A FY14E FY15E EPS (Rs.) EBITDA Margin (%) 20.74% 20.41% 20.30% 20.13% PBT Margin (%) 18.64% 18.26% 18.17% 18.07% PAT Margin (%) 14.39% 14.58% 14.33% 14.21% P/E Ratio (x) ROE (%) 14.76% 14.12% 12.93% 12.16% ROCE (%) 23.43% 21.84% 20.23% 18.97% EV/EBITDA (x) Book Value (Rs.) P/BV Charts

9 Outlook and Conclusion At the current market price of Rs , the stock P/E ratio is at x FY14E and x FY15E respectively. Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs and Rs respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 7% and 7% over 2012 to 2015E respectively. On the basis of EV/EBITDA, the stock trades at 3.60 x for FY14E and 3.17 x for FY15E. Price to Book Value of the stock is expected to be at 1.43 x and 1.25 x respectively for FY14E and FY15E. We recommend BUY in this particular scrip with a target price of Rs for Medium to Long term investment. Industry Overview The Indian economy was faced with a major challenge of managing growth and rising input costs in the past year. The growth in is 6.9%, compared to 8.4% in the previous two years. This slowdown is due to the weak industrial growth. The Indian economy is estimated to register a further decline in the growth rate combined with poor profitability due to increase in interest rates leading to higher borrowing cost and other rising costs. This situation has led to using the internal accruals against borrowings. Overall, there has been a reduction in investment by Corporates, both in the public and private sector. However, in the defence segment, there have been investments by both private and public sector enterprises. Though some impact has been witnessed in terms of higher raw material costs, the defence industry has not seen any negative impact on the demand or manufacturing of defence products. Despite Country s fiscal deficit or inflation issues, the expansionary budget of the Government has helped in increasing the budget for the Defence Ministry this year also. There is an increase in total Defence allocation to Rs. 19,340,70.00 millions compared to Rs. 16,441,50.00 milions in the previous year, a growth of 17.63% over the previous year. Share of Capital Expenditure in the defence budget is projected as 41.15% with a growth of 15% compared to last year. The Defence Production Policy 2011 has emphasised on the self reliance by developing indigenous products and reducing the dependency on the foreign OEMs. This gives opportunities to Indian companies in terms of developing indigenous products required for the Defence forces.

10 The Defence Offset Policy also will gradually help in sourcing products or services from India. Many foreign companies will source directly from Indian Companies or set up Joint Venture to address the Offset Policy requirements. It is to be noted that for MMRCA projects the Offset is at 50% of the contract value whereas it is 30% for all contracts above Rs millions. This gives immense opportunity for BEL not only in MMRCA project but also in other major projects. The Ministry of Defence has come out with a Guidelines document for establishing Joint Venture Companies by Defence Public Sector Undertakings. This opens up the opportunity for Indian & foreign companies to jointly develop products with DPSUs in India within the framework of guidelines. The guidelines will help in enhancing fairness and transparency in the selection of the JV partner by the DPSUs while ensuring a well- defined nature and scope of the tie up. It also provides a streamlined, fair and transparent framework for entering into JVs by DPSUs, with the ultimate objective of obtaining advanced technologies from foreign sources and obtains self-reliance in defence production and shorter time frames for delivery to meet the increasing requirements of armed forces. This will also help BEL to form JVs with reputed Indian and Foreign Companies with the Complementary strengths and address the various segments of defence market. Capital goods industry The capital goods industry is the backbone of India s manufacturing sector. India produces wide range capital goods, including machinery and machine tools. Some of the prominent capital goods produced in India include heavy electrical machinery, textile machinery, machine tools, earthmoving and construction equipment including mining equipment, road construction equipment, material handling equipment, oil & gas exploration equipment, sugar machinery, food processing and packaging machinery, railway equipment, metal surgical equipment, cement machinery, rubber machinery, process plants machinery & equipments, paper & pulp machinery, printing machinery, dairy machinery, industrial refrigeration, industrial furnaces etc. Capacity creation in the Indian capital goods industry has been growing, since liberalization, and in tune with the growth in industry. Capital Goods refer to products that are used in the production of other products but are not incorporated into the new product. These include machine tools, industrial machinery, process plant equipment, construction & mining equipment, electrical equipment, textile machinery, printing & packaging machinery etc. The Capital Goods industry is the mother of all manufacturing industry and is of strategic importance to the National security and economic independence.

11 Planning Commission constituted a Working Group on Capital Goods and Engineering Sector for the 12th Five Year Plan under the Chairmanship of Secretary, Department of Heavy Industry. Seven sector-wise, subgroups, namely, machine tools & plastic processing machinery, earth moving and mining equipment, heavy electrical and power plant equipment, metallurgical machinery, textile machinery, process plant equipment, engineering goods and dies, molds & tool industry were constituted. The methodology consisted of inviting information/suggestions from all the stake holders, such as industry associations, centres of excellence and major PSUs etc. The inputs were deliberated in-depth at various for a, before finalizing the report. The industry growth during 11th Plan stood is at 14%. The turnover during was Rs 2,67,944 crore. There is a need for rapid growth of the sector, for which it is proposed to initiate some national programmes. These in turn will create additional demand. It is also proposed to take steps to substitute imports by domestic production. This is expected to take the sector to Rs 6,81,000 crores in at a CAGR of 16.8%. The current employment of 1.4 million is proposed to be boosted through a series of recommendations to reach 2.8 million by the end of the 12th Five Year Plan. In order to increase technology content in the domestic production, policy and programme initiatives are proposed for R&D, education and training, technology development, technology purchase, technology development abroad on contract, technology acquisition, IPR purchase and ownership, joint technology development and funding for technology up gradation. Some sub-sectors of capital goods in Indian manufacturing sector are not upto the global standards. It is proposed to provide exposure, facilitation, technology development support and support for acquisition of technology firms abroad. Some of the PSUs are proposed to be elevated as national/global champions. Technology and design development support is proposed to be provided to the capital goods sectors for producing energy efficient machines. During the past few quarters, the capital goods sector has been bearing the brunt of slowdown in global economies and sluggish domestic industrial growth. The slowdown in infrastructure as well as key user industries has strained the industry players with slowdown in order inflow, delay in taking deliveries/execution of projects, delayed bill payments etc. The near-term outlook for capital goods remains bleak unless and until some much needed reforms are made in the sector. Government Initiatives The unveiling of Goods and Services Tax (GST) would make India more competitive both in the local and international markets, said Union Finance Minister Pranab Mukherjee. He allso said that its will be helpful in lowering the cascading effect of taxes. Mukherjee also stated that GST would offer a stable tax revenue source. The Finance Minister stated that for the consumer, the biggest advantage of the GST would lower the overall tax burden on goods which presently varies in the range of almost 25-30%.

12 With the aim to enhance international trade, Centre is planning the extend the benefits that e-commerce platforms in Delhi and Mumbai receive for delivering products outside the country to other areas as well, according to Lalit B Singhal, Joint Director General of Foreign Trade. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

13 Firstcall India Equity Research: C.V.S.L.Kameswari Pharma U. Janaki Rao Capital Goods B. Anil Kumar Diversified A.Nagaraju Cement, Reality & Infra, Oil & Gas Ashish.Kushwaha IT, Consumer Durable & Banking Firstcall India also provides Firstcall India Equity Advisors Pvt.Ltd focuses on, IPO s, QIP s, F.P.O s,takeover Offers, Offer for Sale and Buy Back Offerings. Corporate Finance Offerings include Foreign Currency Loan Syndications, Placement of Equity / Debt with multilateral organizations, Short Term Funds Management Debt & Equity, Working Capital Limits, Equity & Debt Syndications and Structured Deals. Corporate Advisory Offerings include Mergers & Acquisitions(domestic and cross-border), divestitures, spin-offs, valuation of business, corporate restructuring-capital and Debt, Turnkey Corporate Revival Planning & Execution, Project Financing, Venture capital, Private Equity and Financial Joint Ventures Firstcall India also provides Financial Advisory services with respect to raising of capital through FCCBs, GDRs, ADRs and listing of the same on International Stock Exchanges namely AIMs, Luxembourg, Singapore Stock Exchanges and other international stock exchanges. For Further Details Contact: 3rd Floor,Sankalp,The Bureau,Dr.R.C.Marg,Chembur,Mumbai Tel. : / / Telefax : info@firstcallindiaequity.com