Bharat Electronics Limited (NSEI:BEL) continues to post impressive revenue growth and its prospects have never been brighter. But the risk I see is around whether the company's recent financial position is sustainable given the way it currently manages its capital. Furthermore, I'm not particularly excited about its valuation either, with its current share price of ₹141.45 hovering above its potential intrinsic value. I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
First, a short introduction to the company is in order. Bharat Electronics Limited designs, manufactures, supplies, and exports electronic products/systems for defense and nondefense markets in India and internationally. Started in 1954, it operates in India and is recently valued at ₹349.02B.
BEL is exceeding expectations, with top-line rocketing up by 17.68% from last financial year , and a bottom line growth of 13.92%. Since 2013, sales has grown 7.42%, congruent with larger capital expenditure, which most recently reached ₹7.94B. BEL has been reinvesting more into the business, leading to expected return on investment of 19.77% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to ₹15.99B over the next year, and over the next five years, earnings are predicted to grow at an annual rate of 11.77% on average, compared to the industry average rate of 5.09%. These figures illustrate BEL's strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.
Investors tend to get swept up by a company's growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. A big red-siren warning for BEL is its low level of cash generated from its core operating activities. Given its debt level is relatively minimal (-95.53% of equity), the fact that BEL's cash only covers a mere -95.53% of debt makes me worry. However, management has been able to reduce debt over the past five years, and it generates enough interest income to cover interest payments. Cash management is still not optimal and should be improved, but its overall debt level and interest coverage somewhat increases my conviction of the sustainability of the business going forward. BEL has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. BEL has managed its cash well at a current level of ₹33.28B. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.
BEL is now trading at ₹141.45 per share. At 2.46 billion shares, that's a ₹349.02B market cap - which is expensive for a company that has a 5-year cumulative average growth rate (CAGR) of 8.16% (source: analyst consensus). With an upcoming 2018 free cash flow figure of ₹925.67M, the target price for BEL is ₹89.11. Therefore, the stock is trading at a premium. Moreover, comparing BEL's current share price to its peers based on its industry and earnings level, it's overvalued by 20.98%, with a PE ratio of 23.92x vs. the industry average of 19.77x.
In order to invest in BEL, you have to believe in its growth story, which is a strong one. However, my main reservation with the company is its financial health, as well as the possibility that it is currently overvalued. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.