Company Update Excellent Margins Led by Strong Revenue Growth Revenue Analysis: Total order backlog as on Oct 1, 216 stood at Rs. 347 Bn, out of this, export order back log is US$.1 Bn. Incremental orders received during Q2FY17 was to the tune of Rs. 41 Bn. BEL s standalone Revenue for Q2FY17 grew by 16.2% (YoY). On the back of Indian government s focus on defense and increasing reforms in the defense sector, we expect the BEL consolidated revenues to grow at a CAGR of over 9.5% during FY16-18E to reach Rs. 9522 Mn in FY18E. EBITDA and Margin Analysis: BEL s standalone EBITDA during Q2FY17 increased by 87.4% (YoY). EBITDA margin increased to 18.9% which was the highest in the last 5 years in the same corresponding quarter. We expect the EBITDA to grow at a CAGR of over 6.9% during FY16-FY18E to reach Rs. 15938 Mn in FY17E and Rs. 17574 Mn in FY18E while maintaining the EBITDA margin of 19.4% in FY17E and FY18E. PAT Analysis: Standalone PAT for the quarter without giving the effect for changes in other comprehensive income (on account of IndAS adoption) has grown by 68.2% to reach Rs. 3462 Mn on account of healthy revenue growth and improved operating margins led by operating efficiencies. Outlook and Valuation We have rolled out FY18E estimates. BEL, the pure defense play in this sector, with its consistent track record in terms of execution and performance along with healthy balance sheet with almost zero debt, it is likely to benefit in terms of its performance. With the company s focus on indigenization along with indigenous R&D, collaborative R&D Tie-ups, partnership with academic institutions, selective tie-ups with foreign OEMs along with focus on modernization, consistently increasing the investment in capex backed by the healthy order book provides the long term visibility for the company s revenue growth. We have rolled forward our valuation to FY18E EPS and assigned a 21.x P/E to value BEL based on a 1 year forward FY18E EPS of Rs. 68.8 to arrive at an upwardly revised target price of Rs. 1449 for a time frame of 9-12 months. Key Risks Any slowdown in Government s reform process or increasing competition from private players entering the defense business can put pressure on revenue growth as well as on the earnings. Exhibit 1: Valuation Summary Industrials - Aerospace & Defense - Aircraft & Parts Bloomberg Code: BHE IN India Research - Stock Broking Net Sales 65179 7926 75485 82257 9522 EBITDA 9219 11746 15376 15938 17574 EBITDA Margin (%) 14.1 16.6 2.4 19.4 19.4 Adj. Net Profit 9513 11972 13871 1425 15376 EPS (Rs.)** 39.6 49.9 56.6 63.6 68.8 RoE (%) 13.9 15.6 16.2 16.9 18.5 PE (x) 9.6 22.4 21.6 2.5 19. ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price ** EPS for FY14 and FY15 are adjusted with the bonus issue in FY16 For private circulation only. For important information about Karvy s rating system and other disclosures refer to the end of this material. Karvy Stock Broking Research is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters Recommendation (Rs.) Nov 5, 216 CMP (as on Nov 4, 216) 135 Target Price 1449 Previous Target Price 14 Upside (%) 11 Stock Information Mkt Cap (Rs.mn/US$ mn) 31392 / 476 52-wk High/Low (Rs.) 1417 / 18 3M Avg. daily volume (mn).3 Beta (x) 1. Sensex/Nifty 2743 / 8485 O/S Shares(mn) 24. Face Value (Rs.) 1. Shareholding Pattern (%) Promoters 74.4 FIIs 3.9 DIIs 15.3 Others 6.4 Stock Performance (%) 1M 3M 6M 12M Absolute 3 6 11 4 Relative to Sensex 6 7 2 1 Source: BSE, Bloomberg Relative Performance* 12 11 1 9 8 Nov-15 Dec-15 Jan-16 Feb-16 Source: Bloomberg; *Index 1 Analyst Contact Kaushal Kumar Jaitliya 4-3321 6275 Mar-16 BHE IN Apr-16 May-16 jaitliya.kaushal@karvy.com Jun-16 Jul-16 Aug-16 HOLD Sep-16 Sensex Oct-16 Nov-16 1
Exhibit 2: Q2FY17 Performance Comparison YE Mar (Rs. Mn) Q2FY17 Q1FY17 QoQ % Q2FY16 YoY % Turnover 17946 9278 93.4 1545 16.2 Expenditure 14562 9669 5.6 13644 6.7 EBITDA 3384 (391) NA 186 87.4 Depreciation 455 435 4.7 47 11.7 Interest 3 NA 3 (3.8) Other Income 1714 1312 3.7 1316 3.3 PBT 4641 486 855.1 2712 71.1 Tax 1178 125 842.6 654 8.3 PAT 3462 361 859.5 258 68.2 Other Comprehensive Income/(Loss) (net of tax) 131 13.8 132 (1.2) Adjusted PAT 3332 231 134 1926 73 EBITDA Margin (%) 18.9 (4.2) 237 bps 11.7 717 bps EBIT Margin (%) 16.3 (8.9) 2522 bps 9.1 727 bps Net Profit Margin (%) 17.6 3.4 142 bps 12.3 533 bps Quarterly Performance Snapshot Exhibit 3: Quarterly Revenue Trend 2 Exhibit 4: Half-Yearly Revenue Trend 28 15 1 5 1636 1448 1294 1545 17946 21 14 7 1865 19431 2362 2643 27224 H1FY13 H1FY14 H1FY15 H1FY16 H1FY17 Quarterly Revenue (Rs. Mn) Half Yearly Revenue (Rs. Mn) Exhibit 5: Quarterly EBITDA and EBITDA Margin Trend 4 3 2 1.2% -1.% -11 17 11.7% 9.2% 1189 186 18.9% -1-1% EBITDA (Rs Mn) EBITDA Margin (%) 3384 26% 2% 14% 8% 2% -4% Exhibit 6: Quarterly PAT and PAT Margin Trend 36 24 6.6% 5.2% 12 82 12.3% 1.5% 594 147 258 17.6% PAT (Rs. Mn) PAT Margin (%) 3462 18% 12% 6% % 2
Exhibit 7: Quarterly Effective Tax Trend Exhibit 8: Quarterly Other Income as a % of Total Income 26% 25% 24% 23.3% 23% 22.6% 22.4% 24.1% 25.4% 14% 12.% 12% 9.5% 1% 7.9% 7.8% 8% 8.7% 22% 6% Effective tax trend (%) Other income to total income (%) Order Book Analysis: Total order backlog as on Oct 1,216 stood at Rs. 347 Bn, out of this, export order back log is US$.1 Bn. Incremental orders received during Q2FY17 were to the tune of Rs. 41 Bn. Major orders obtained amongst the product lines during the quarter were Electronic warfare suite (shakti and nayan), Advances composite communication system, Ship data network and Annual Maintenance Contract for Rohini radar. Revenue Analysis: BEL s standalone Revenue for Q2FY17 grew by 16.2% led by some major supplies from 3D Tactical Control Radar, Akash Weapon System (Army), L7 Gun Upgrade, Weapon locating radar and Hand held thermal imager with laser range finder. As of FY16, around 82% of the revenue has been from defense while the rest 18% has come from civilian products. Nearly 7% of the Indian defense requirements are met through imports. According to the officials at the Ministry of Defense, though the exports from India were only to the tune of Rs. 6.7 Bn in FY15, the government has simplified and streamlined the No Objection Certificate (NOC) processes to encourage Defence Public Sector Undertakings (DPSUs). We expect the BEL consolidated revenues to grow at a CAGR of over 9.5% during FY16-FY18E to reach Rs. 9522 Mn in FY18E. This is on account of increasing reforms in the Indian defense sector backed by the increasing Make-in-India focus along with the increase in the order book while maintaining the execution pace against the order back log of.25 in FY17E and.26 in FY18E. Major orders expected in FY17E include Akash missile system (7 sqdn), Mobile cellular communication system, Commander TI sights, Samyukta upgrade, Long range surface to air missile and L-band tropo upgrade. EBITDA and Margin Analysis: BEL s standalone EBITDA during Q2FY17 increased by 87.4% (YoY) led by decrease in the cost of goods sold whereby witnessing an improvement in gross margins to 52.5% from 45.3%. EBITDA margin increased to 18.9% which was the highest in the last 5 years in the same corresponding quarter. We expect the EBITDA to grow at a CAGR of over 6.9% during FY16-FY18E to reach Rs. 15938 Mn in FY17E and Rs. 17574 Mn in FY18E while maintaining the EBITDA margin of 19.4% in FY17E and FY18E. PAT Analysis: Standalone PAT for the quarter without giving the effect for changes in other comprehensive income has grown by 68.2% to reach Rs. 3462 Mn on account of healthy revenue growth and improved operating margins led by operating efficiencies. R&D expenditure as a % of revenue for FY16 stood at 9.4% which has increased from 7.7% in FY12. With the company s focus on increasing the spend towards R&D (which is Department of Scientific and Industrial Research (DSIR) recognized under Section 35(2AB) of the Income Tax Act, 1961), effective income tax rate for the quarter stood at 25.4% which made the PAT margin increase to 17.6%. We expect the PAT to grow at a CAGR of over 5.3% to reach Rs. 1425 Mn in FY17E and Rs. 15376 Mn in FY18E, while maintaining the PAT margin of 16.2% in FY17E and 16.% in FY18E. Update on Buy-back offer: During the month of Oct 216, BEL announced the buy-back of 166,37,27 shares at a price of Rs. 135/- per share of face value of Rs. 1 each leading to an estimated cash outflow of Rs. 21,711.5 Mn. This will be made out of its well-built reserves and increased cash balance. Post buyback, it is expected to witness a drop in its Networth leading to reduction in book value and simultaneously increasing the earnings per share and return ratios in terms of RoE and RoCE. We have factored in the amount spent on the buy-back in our estimates. 3
Exhibit 9: Shareholding Pre and Post Buy back Before Buy-back Post Buy-back Category No. of equity shares Holding (%) No. of equity shares Holding (%) Promoters 18,,42,63 75. 16,62,13,859 74.4 DIIs 3,48,94,911 14.5 3,42,5,576 15.3 Foreign Investors 91,85,7 3.8 87,29,435 3.9 Others 1,58,76,759 6.6 1,42,13,923 6.4 Total 24,,, 1. 22,33,62,793 1. Source: BSE, Karvy Research Outlook: With the government s reform towards promoting self-reliance, increasing the indigenization, technology up-gradation, achieving economies of scale under Make-in-India initiative, developing capabilities for exports in the defense sector along with the focus on faster execution of defense projects and increasing the foreign investment in defense sector thereby increasing the Make-in-India opportunities. The government s recent decision to raise cap on Foreign Direct Investment (FDI) from 26% to 49% in the defense sector, allowing foreign manufacturers to build more defense components without licenses will further make it easier for Indian firms to partner foreign firms. With the Prime Minister of India laid down an ambitious plan to sharpen the country s combat capabilities and transform India from the world s largest arms importer to a major defense equipments manufacturer, this provides visibility for the companies engaged in the defense activities. BEL, the pure defense play in this sector, with its consistent track record in terms of execution and performance along with healthy balance sheet with almost zero debt, it is likely to benefit in terms of its performance. With the company s focus on indigenization along with indigenous R&D, collaborative R&D Tie-ups, partnership with academic institutions, selective tie-up with foreign Original Equipment Manufacturers (OEMs) along with focus on modernization, consistently increasing the investment in capex backed by the healthy order book provides the long term visibility for the company s revenue growth. Valuation: BEL over the last 7 years (after adjustment towards the bonus issue of 2 shares for every 1 share held in Sep 15) on an average has traded in the average 1 year forward P/E multiple of 16.8x while trading at 18.8x in FY15 and 25.4x in FY16. Similarly, on an average 1 year forward P/B multiple, BEL has traded at an average 2.8x in the last 7 years. We assign a 21.x P/E to value BEL based on a 1 year forward FY18E EPS of Rs. 68.8 to arrive at a target price of Rs. 1449 for a time frame of 9-12 months which is also the price based on 3.7x FY18E book value per share. Exhibit 1: P/E Trend 6 4 2 Exhibit 11: P/B Trend 4 3 2 1 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 1 Yr Forward P/B 1 Yr TTM P/B Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 1 Yr Forward P/E 1 Yr TTM P/E Source: BSE, Karvy Research Source: BSE, Karvy Research 4
Financials Exhibit 12: Income Statement Revenues 65179 7926 75485 82257 9522 Growth (%) 3.9 8.8 6.4 9. 1. Operating Expenses 55959 5918 619 66318 72948 EBITDA 9219 11746 15376 15938 17574 Growth (%) 39.1 27.4 3.9 3.7 1.3 Depreciation & Amortization 1499 1662 1996 236 2635 Other Income 4373 567 5335 5495 577 EBIT 772 185 13381 13633 14939 Interest Expenses 4 27 62 69 76 PBT 1259 15133 18577 1959 2632 Tax 2542 3162 4712 486 5261 Adjusted PAT 9513 11972 13871 1425 15376 Growth (%) 4.5 25.8 15.9 2.4 8.2 Exhibit 13: Balance Sheet Cash & Cash Equivalents 4645 6379 75529 6256 69981 Sundry Debtors 41559 3853 3747 436 45261 Inventory 33397 34242 42128 46342 5112 Loans & Advances 12585 7624 653 6756 7554 Investments 1 2422 2422 2422 Gross Block 2366 28944 31761 36761 41861 Net Block 6947 173 12329 1523 17489 CWIP 4582 143 4315 4315 4315 Miscellaneous 4641 4824 562 5197 5345 Total Assets 149757 157256 185245 182867 22478 Current Liabilities & Provisions 7526 73723 9323 1249 112742 Debt 29 284 312 34 374 Other Liabilities 2282 22 1795 1797 18 Total Liabilities 77517 7627 95337 14547 114916 Shareholders Equity 8 8 24 2234 2234 Reserves & Surplus 7143 8368 87461 7645 85292 Total Networth 7223 81168 89861 78279 87526 Minority Interest 38 61 48 42 37 Total Networth & Liabilities 149757 157256 185245 182867 22478 5
Exhibit 14: Cash Flow Statement PBT 1259 15133 18577 1959 2632 Depreciation 1499 1662 1996 236 2635 Interest 4 27 62 69 76 Tax Paid (255) (3556) (4383) (486) (5261) Inc/dec in Net WC (12371) 4362 9928 1231 667 Other Income (431) (4328) (4717) (5495) (577) Other non cash items (528) 138 111 137 (215) Cash flow from operating activities (5666) 14337 22573 13616 12764 Inc/dec in capital expenditure (3747) (2272) (6571) (5) (51) Inc/dec in investments 73 (1479) (12459) 5 Others 4311 436 4789 5489 577 Cash flow from investing activities 7594 (8392) (14241) 5489 67 Inc/dec in borrowings (1) 248 36 29 32 Dividend paid (292) (22) (2962) (5376) (5914) Interest paid (4) (27) (62) (69) (76) Others (24) (112) (29) (21712) Cash flow from financing activities (2158) (29) (3197) (27128) (5959) Net change in cash (23) 3856 5135 (823) 7475 Exhibit 15: Key Ratios YE Mar FY14 FY15 FY16 FY17E FY18E EBITDA Margin (%) 14.1 16.6 2.4 19.4 19.4 EBIT Margin (%) 11.8 14.2 17.7 16.6 16.5 Net Profit Margin (%) 13.7 15.8 17.2 16.2 16. Dividend Payout Ratio (%) 19.6 19.5 3.1 31.4 32. Net Debt/Equity (x) (.6) (.7) (.8) (.8) (.8) RoE (%) 13.9 15.6 16.2 16.9 18.5 RoCE (%) 1.7 12.4 14.8 17.3 17. Exhibit 16: Valuation Parameters YE Mar FY14 FY15 FY16 FY17E FY18E EPS (Rs.)** 39.6 49.9 56.6 63.6 68.8 DPS (Rs.)** 7.8 9.7 17. 2. 22. BVPS (Rs.)** 292.4 328.5 363.9 35.5 391.9 PE (x) 9.6 22.4 21.6 2.5 19. P/BV (x) 1.3 3.4 3.4 3.7 3.3 EV/EBITDA (x) 4.9 17.7 14.1 14.4 12.6 EV/Sales (x).7 2.9 2.9 2.8 2.5 ; *Represents multiples for FY14, FY15 & FY16 are based on historic market price **EPS, DPS, BVPS for FY14 and FY15 are adjusted with the bonus issue in FY16 6
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