Investments in Bharat Electronics can be considered with a two-three year perspective. Healthy order book, robust cash flows and moves to reduce dependence on revenues from defence sector augur well for the earnings growth of Bharat Electronics (BEL).
The company also holds a track record of paying liberal dividends. The stock trades at 14 times its expected earnings for FY07, assuming a 19 per cent growth in earnings.
BEL is one of the largest manufacturers and suppliers of wireless and satellite communication equipment, electronic surveillance systems and simulators for the defence sector and electronic systems in the civilian segment. At present, the company maintains its forte in the defence business and has collaboration with Defence Research and Development Organisation. It has a number of system developments to launch new products are at an advanced stage through this collaboration. Development of newer products and initiatives in research are likely to help the company maintain its dominant position in the electronic defence sector despite opening up of the defence market to private sector.
While defence has so far accounted for over 80 per cent of its revenues, the company is working towards changing the revenue mix through increased activity in the civilian segment. Initiatives in areas such as end-to-end solutions for FM transmitters, opportunities in expansion of CDMA and GSM networks and solar lighting systems have started yielding results. We expect a more balanced business mix by 2008 that may well mitigate risk of dependence on a single sector. While order book as of March 2006 stood at over Rs 6,600 crore (about two times FY06 revenues), the company booked about Rs 800 crore of new orders in the first half of FY07. We expect this order book to comfortably sustain growth for the next couple of years.
The earnings scorecard for the half-year ended September 2006 remained flat for BEL owing to delayed revenue booking, especially from the defence sector. The company has in earlier years shown a weak trend in the first half of the year with a majority of revenues catching up in the latter half. Though operating profit margins have been muted in the latest quarter, it is expected to bounce back as revenue flow increases in the second half.