Bharat Electronics: Phase of earnings decline may be a thing of the past

Analysts now expect execution to pick up from the current quarter and believe that the phase of earnings decline is largely behind.
Bharat Electronics (BEL), which is down 40 per cent from its November highs, fell on Wednesday to levels last seen in December 2014. While the broader markets have trended down too, BEL has underperformed significantly on the back of weak execution-led performance and worries of an earnings miss in FY20. The government’s stake-sale overhang too had kept Street concerns elevated.

Despite a strong order book, the company had disappointed on the execution front in the December quarter (Q3). Unavailability of inputs, modification in scope of work by clients, non-readiness of sites for carrying out installations and lengthy customer clearance for dispatches have been cited by analysts as reasons for delayed execution. Hence, the company’s revenues declined 16.4 per cent year-on-year, while adjusted net profit more than halved in Q3. Consequently, for the nine months ending December 2019, consolidated revenue was down 14 per cent to Rs 7,151 crore and net profit by 40 per cent to Rs 753.7 crore, over the corresponding year-ago period. The expectations are that the company will miss its 10-12 revenue growth guidance for FY20 by a significant margin.

The worst, however, may be behind. Analysts now expect execution to pick up from the current quarter and believe that the phase of earnings decline is largely behind, adding that issues pertaining to supplies for the input equipment remain resolved and execution of programs like Large Range Surface to Air Missile (LRSAM) will pick up.

The company’s strong order book of Rs 55,000 crore, too, provides 4-5 years of revenue visibility. The order inflow for more-profitable competitively-won projects is also to grow faster than nomination-based jobs. This will benefit margins as under the new policy, pre-tax profit margin for nomination-based contracts had been reduced from 12 per cent to 7.5 per cent. Further, analysts say that India’s defence capex remains unaffected by coronavirus-led disruption. BEL, being India’s strategic defence electronics supplier, has seen its earnings grow in sync with defence capex and largely remains unaffected.

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