Higher defence spending revs Q4 show of BEML, BEL

The March quarter results broke three quarters of decline in revenues. The Street cheered and the stock gained 4.5 per cent on Wednesday
When some of the larger state-run firms such as Coal India and Bharat Heavy Electricals lagged Street expectations, relatively smaller BEML’s numbers were ahead of the estimates.

Its March quarter results (announced after market hours on Tuesday) broke three quarters of decline in revenues. The Street cheered and the stock gained 4.5 per cent on Wednesday.

Revenue for the quarter (fourth or Q4 of 2016-17) rose by 18 per cent to Rs 1,346 crore. Net profit grew 26 per cent to Rs 186 crore.

While segmental results are awaited, analysts believe much of the performance could be attributed to an improvement in the defence sector. Some believe its contribution to overall revenue would have increased from Rs 330 crore in FY16 to Rs 800–900 crore in FY17.

“This is a major positive and reiterates that BEML is on the right track to reducing its dependence on the coal sector and strengthening its product base,” says an analyst from a domestic brokerage.

BEML aspires to increase the share of defence revenues to 30 per cent in the long term. It has partnered with Bharat Dynamics (BDL) to build the military's Futuristic Infantry Combat Vehicle (FICV), where the order inflows projected are Rs60,000 crore. The tie-up with BDL would also help it to supply missile aggregates and associated technologies.

Such tie-ups also reduce BEML’s dependence on its traditional supply of Tatra trucks to the army. Thereby evening out the uncertainties in execution or order inflows as seen in FY11-16, particularly for the defence segment.

Even in the mining and construction segment, BEML’s mainstay and contributing to about half its revenue, the aim is to reduce the dependence on Coal India for sale of its tippers. While the construction equipment business, mainly catering to road construction projects of the National Highways Authority of India is a relatively new vertical, BEML targets 60-65 per cent growth in this space in FY18.

The only uncertain patch for now might be the railway and metro rail segment, where execution has been slower than expected. On the whole, swift expansion in defence revenue will be the key theme ahead.

Y-o-Y: Year-on-year; bps: Basis points; E: Estimates | Sources: Companies, Brokerage reports
Bharat Electronics or BEL is another beneficiary of improvement in defence spending by the government. Revenue growth in FY17 has been the best in four years and an order book of Rs 40,000 crore provides revenue comfort for at least four years. Order inflow for FY18 is estimated at Rs 16,000 crore.

However, the next 18 months might see dilution in operating margins; BEL will undertake Rs 6,000 crore of orders for the low margin voter-verifiable paper audit trail (VVPAT) machines for the Election Commission.

Despite this, analysts at Credit Suisse term BEL a reliable public sector undertaking, with broad capability, set in a focused environment. “It has emerged as a large system integrator with projects such as the Akash Missile. We believe the execution environment in the defence sector is better under the current government,” the analysts add.

While the BEL stock hasn’t reacted much since it announced its provisional results on April 11, Credit Suisse has revised its 12-month target price for the stock to Rs 200 from the earlier Rs 180.

However, while the fundamentals remain promising for BEML and BEL, investors could wait for a better entry point to the stock, given the sharp 26 per cent year-to-date appreciation in their prices. The overhang of the government’s stake sale plan will also weigh on both. For BEML, the government plans to invite a strategic private player; stake reduction in BEL is part of the overall divestment objective.

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