Strategic Expansion Into Cyber Security And Unmanned Systems Promises Robust Future Growth

Key Takeaways

• Strategic expansion into new areas aims to diversify revenue with high-margin products and services like cyber security and unmanned systems.
  
• Strong export pipeline could boost earnings by reducing reliance on domestic defense budget cycles through geographic diversification.
  
• Delayed orders, negative cash flow, and revenue variability due to sector dependency pose significant risks to Bharat Electronics' future profitability and liquidity.

Catalysts

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

• BEL expects robust order inflows in the second half of FY '25, targeting major contracts like the CB radar and Electronic Warfare Suites, potentially driving significant future revenue growth.
  
• BEL's turnover for H2 '25 is projected to increase, supported by high inventory levels to fulfill anticipated orders, which could enhance revenue and profit margins by leveraging scale.
  
• The company is actively focusing on increasing indigenous content across products, which could lead to sustainable improvement in gross margins and profitability by reducing dependency on imports.
  
• Strategic expansion into new areas via additional Strategic Business Units (SBUs), including cyber security and unmanned systems, aims to diversify revenue streams and potentially improve net margins through new high-margin products and services.
  
• BEL has a strong order pipeline for export markets, aiming to increase export revenue contributions, which could enhance earnings through geographic diversification and reduced reliance on the domestic defense budget cycle.

Bharat Electronics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bharat Electronics's revenue will grow by 17.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.0% today to 20.1% in 3 years time.
• Analysts expect earnings to reach ₹69.6 billion (and earnings per share of ₹8.4) by about November 2027, up from ₹45.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹54.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 56.1x on those 2027 earnings, up from 48.3x today. This future PE is greater than the current PE for the IN Aerospace & Defense industry at 35.4x.
• Analysts expect the number of shares outstanding to grow by 4.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.28%, as per the Simply Wall St company report.

Bharat Electronics Future Earnings Per Share Growth

Risks

• Order inflow is trailing the guidance with ₹7,500 crores achieved so far against the expectation of ₹25,000 crores, indicating potential slippage in future revenue if not met.
  
• Negative operating cash flow of ₹2,300-odd crores due to increased debtors and inventory levels poses a risk to free cash flow and liquidity.
  
• Uncertainty about receiving large-scale defense orders promptly, like the Ashwini Radar, impacts order visibility and future revenue growth.
  
• Margins might not sustain if product mix changes unfavorably, despite current high EBITDA margins from certain executed contracts, posing a risk to future profitability.
  
• Dependence on specific orders from sectors like naval platforms might lead to revenue variability if there are delays or competition from private players.

Valuation

• The analysts have a consensus price target of ₹333.13 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 ₹390.0, and the most bearish reporting a price target of just ₹213.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹345.9 billion, earnings will come to ₹69.6 billion, and it would be trading on a PE ratio of 56.1x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of ₹300.2, the analyst's price target of ₹333.13 is 9.9% 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.