Securing QRSAM And MRSAM Contracts Will Strengthen Future Prospects

Key Takeaways

• Diversification into non-defense sectors and localization efforts aim to enhance revenue stability and improve margins.
  
• High-profile defense projects and major order inflows are set to significantly boost future revenue and earnings growth.
  
• Uncertainty in meeting order inflow targets, contract delays, and defense spending reliance could jeopardize revenue growth and profitability.

Catalysts

Designs, manufactures, and supplies electronic equipment and systems for the defense and civilian markets in India.

• Bharat Electronics is targeting substantial order inflows for major projects like QRSAM (around ₹25,000 to ₹30,000 crores) and MRSAM packages for next-generation corvettes, both expected to be finalized before March 2026. These orders will significantly enhance future revenue growth.
  
• The company is working on various high-profile defense projects and electronic warfare systems, like the Ashwini Radar and Mi-17 contracts, which are nearing finalization. These developments are likely to strengthen revenue and execution timelines.
  
• Bharat Electronics is emphasizing non-defense sectors by targeting a double-digit revenue share from areas such as network and cybersecurity, homeland security, and data centers. This diversification strategy could improve revenue stability and potentially enhance margins.
  
• Progress in localization efforts and collaboration on projects like Uttam Radar and indigenized electronic warfare systems could lead to cost efficiencies and support improved margin profiles in future years.
  
• The execution of large-scale projects, including the Akash Prime and BMP-2 upgrades, over 4 to 5 years, alongside anticipated high-margin new orders, positions the company for sustained revenue and earnings growth.

Bharat Electronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bharat Electronics's revenue will grow by 15.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.5% today to 20.1% in 3 years time.
• Analysts expect earnings to reach ₹72.2 billion (and earnings per share of ₹9.88) by about April 2028, up from ₹49.9 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 49.3x on those 2028 earnings, up from 41.4x today. This future PE is lower than the current PE for the IN Aerospace & Defense industry at 52.9x.
• Analysts expect the number of shares outstanding to grow by 0.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.83%, as per the Simply Wall St company report.

Bharat Electronics Future Earnings Per Share Growth

Risks

• Bharat Electronics' ability to meet its order inflow targets appears uncertain, with current order inflows significantly lower than initial guidance, potentially impacting future revenue growth.
  
• Delays in finalizing large contracts, such as the Ashwini Radar and HimShakti projects, could lead to unpredictable revenue streams and affect the company's earnings.
  
• With a significant portion of revenue dependent on defense projects, any delays or reductions in government defense spending could negatively impact the company's revenue forecasts.
  
• The company faces competition and potential delays due to slow decision-making in large government projects like the QRSAM and MRSAM, which might affect future order inflows and revenue growth.
  
• Execution risks related to indigenization and localization efforts, if not managed effectively, may lead to increased costs, impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of ₹336.87 for Bharat Electronics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹380.0, and the most bearish reporting a price target of just ₹224.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹359.4 billion, earnings will come to ₹72.2 billion, and it would be trading on a PE ratio of 49.3x, assuming you use a discount rate of 12.8%.
• Given the current share price of ₹282.4, the analyst price target of ₹336.87 is 16.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.