Bharat Electronics: Defence for your portfolio

The postponement of capital expenditures by private sector companies was one of the biggest casualties of Covid-19 induced disturbances. Most of the capital goods companies suffered because of the same. However, Bharat Electronics (BEL), a primary supplier of electronic equipment to Indian defence services and a beneficiary of government’s plan to increase indigenisation and reduce import dependency across the defence sector, was undeterred by these disturbances.Analysts continue to repose faith in the execution capability of BEL calling it the best player in the Indian defence sector. The provisional numbers released by the company for 2020-21 also demonstrate its execution capability. This Navratna company was able to clock a record turnover of Rs 13,500 crore in 2020-21, up by 7% y-o-y. It also garnered a record order inflow of Rs 15,000 crore, up by 14% y-o-y. Its outlook for 2021-22 and beyond is also bright as its order book now stands at Rs 53,000 crore, four times its 2020-21 revenues.Its reasonable valuation is another reason attracting the analysts to this counter. BEL is quoting at a PE of 17.63 times at present, despite having around 18% return on the equity. Huge contraction in valuations of all public sector enterprises due to piecemeal stake sales by the government, is the main reason for this. Valuation should improve now since the government has decided to stop piecemeal stake sales and go for strategic divestments. Sentiment driven re-rating has already started and the same is expected to be faster in companies like BEL, with improving fundamentals.Focus on just one sector, defence was another reason why the market used to give it lower valuations. BEL’s diversification plan, which is to non-defence related sectors, is also gaining traction now. It continues to execute big-ticket orders for ICU ventilators, homeland security, smart city projects, fibre optic networks, etc. Analysts now believe that BEL will be able to increase its non-defence related revenue share from around 7% now to around 15% in the next three years.Cash flow pressures and high working capital cycle, mostly due to delayed payments from defence establishments, is another reason for its low valuations. However, there was a robust increase in defence budget for 2021-22 and this reduces the risk of delayed payments. Cash flow pressures should also reduce due to its diversification and increased contribution from non-defence-related sectors.Analysts’ viewsBuy: 22Sell: 1Hold: 382115341Selection MethodologyWe pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.

from Economic Times https://ift.tt/3gpC3ku