25 Apr Fundamentally Strong Defence Stock with potential upside

Fundamentally Strong Defence Stock with potential upside

The government’s policies for the defence sector have caused changes in the way defence companies operate and how people see them. Their order books are full, their stocks are doing better than the rest of the market, and more investors are interested in them.

However, the budget’s expectations caused some ups and downs in the stock prices.

The government has been saying for a while that it prefers to buy from domestic defence companies, and this is starting to show in the stock market.

It’s not easy for investors to invest directly in the defence business because it’s usually a subsidiary of a larger company.

So, to invest in the defence sector, investors should look at companies that only focus on defence. Some of these companies are owned by the government.

If you look at NSE-listed stocks that only do defence, you will find that most of them are doing well financially, despite the government being their biggest customer.

Here is one such stock suggested by the experts.

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Bharat Electronics Limited (BEL) is a state-owned aerospace and defence electronics company in India.

-founded in 1954 and is headquartered in Bengaluru, Karnataka.

-BEL has nine factories and several regional offices across India.

-The company employs over 11,000 people, including engineers, technicians, and other professionals.

-The company

designs,
develops,
manufactures, and
supplies electronic products and systems

to the Indian Armed Forces, Navy, Air Force, and other defence-related establishments.

-The company’s products and services include

radars,
sonars,
electronic warfare systems,
communication systems, and
naval systems.

-BEL is also involved in research and development activities and has collaborations with various academic institutions and research organizations.

-In recent years, BEL has been working on developing new products and technologies, such as

electronic voting machines,
solar-powered traffic signal systems, and
unmanned aerial vehicles (UAVs).

-BEL has received several awards and recognitions for its products, services, and performance, including the prestigious “Navratna” status by the Indian government.

Industry Analysis:

-The aerospace and defence electronics industry in India is expected to grow at a CAGR of 8.6% between 2021 and 2026.

-BEL faces competition from both domestic and international players, but the company has a strong market position and a reputation for quality and reliability.

Revenue: 

-Q3 turnover increased 24.46% YoY to Rs.11005 Crores
-Order book position at Rs.50116 Crores as of January 1, 2023
-Management is confident of achieving guidance of around Rs.20000 Crores in orders for FY2023
-The company expects revenue growth to be 15%+ this year and closer to 20% in the next two years

Orders:

-Key orders expected include

Electronic Warfare System,
CPR orders, and
equipment for ships and submarines

-Order backlog is 80% defence and 20% civil market
-Service revenues make up around 10% of total revenues

-Exports order book currently at 2000 Crores, working aggressively on the export front with government push and business delegations

Diversification and Expansion:

-Working on diversification and expansion in the civilian market and exports

-Tied up with the Airport Authority of India for the development of an air traffic management system and Airport Surveillance Radar

-Expanding into various businesses such as
civilian applications,
cyber security, and
networking solutions

-Working on various defence applications such as
perimeter security and
submarine-related activities

Margins and Capex:

-Gross margins are expected to remain around 40% for the year
-Expects to maintain current margins and increase them through cost efficiencies
-Investing in new infrastructure and factories to support growth, with a capex of around 600-800 Crores per year

Key Highlights:

-Strong top-level management with continuity and succession planning in place

-EVM and VVPAT orders are expected to continue due to state polls and new voters

-Expects PMCs to be finalized with retaining guidance closer to Rs. 20,000 Crores

-MOUs with Delhi Metro, Airport Authority of India, Munitions India Limited, and Yantra India Limited for complementary technology and expertise

BEL invests heavily in R&D, with a strong R&D base of 2700 engineers and scientists, key strength of the company.

• Market Cap ₹ 74,414 Cr.
• Current Price ₹ 102
• High / Low ₹ 115 / 71.9
• Stock P/E 27
• Industry PE 45
• Dividend Yield 1.47 %
• ROCE 27 %
• ROE 20 %
• OPM 21 %
• Debt ₹ 0.00 Cr.
• Qtr Profit Var 2.88 %
• Qtr Sales Var 12.2 %

Risks and Concerns

-BEL’s revenues are heavily dependent on the Indian government’s defence spending, which could be impacted by budget cuts or changes in government policies.
-The company’s export business could be affected by changes in global trade policies or geopolitical tensions.
-BEL’s research and development expenses are high, which could impact the company’s profitability if new products or technologies do not generate sufficient revenues

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