Buy BHEL

Bharat Electronics

Cluster: Apple Green

Recommendation: Buy

Price target: Rs1,610

Current market price: Rs1,179
Price target revised to Rs1,610

Key highlights
Bharat Electronics Ltd (BEL) announced its provisional results for FY2008. The company reported gross sales of Rs4,114 crore and profit before tax (PBT) of Rs1,109 crore during FY2008. The company's gross sales increased marginally by 4.1% and the PBT grew by 5.2% over FY2007. As a result in line with our expectations, BEL has missed its sales target of Rs4,725 crore as per the performance Memorandum of Understanding (MoU) signed with the Ministry of Defence.

The implied Q4 results appear to be quite robust with growth of around 32% and 39.3% in the net sales and the PBT respectively. The implied Q4 sales and PBT are at Rs2,296.8 crore and Rs720.2 crore respectively. The company reported 18.6% decline in the net sales during the first nine months ended December 2007, which acted as a dampener to the company's overall financial performance.

The company's pending order book stood at Rs9,450 crore as on April 1, 2008, up from Rs9,130 crore at the beginning of FY2008. The low growth in the order book was due to lower order inflows of Rs4,434 crore in FY2008 versus Rs6,460 crore in FY2007.

The turnover per employee for 2007-08 was Rs33.26 lakh as against the last year's figure of Rs31.99 lakh, while the value added per employee for 2007-08 was Rs15.5 lakh as against last year's figure of Rs14.5 lakh.

The company's healthy performance during the last quarter represents a strong operating profit margin (OPM) of 30.2% (derived backwards from the PBT numbers keeping our forecasts for other income, interest, and depreciation unchanged), which helped enhance the yearly OPM to 23.8% as against our estimates of 20.9% for 2008. At the current market price of Rs1,179 the stock trades at 12.5x FY2008E and 10.6x FY2009E earnings estimates. On an adjusted earnings (adjusted for cash) basis, the company trades at 8.2x FY2008E and 5.8x FY2009E, which offers strong downside support to the stock. Consequently, we are revising our recommendation on the stock to Buy with a revised price target of Rs1,610 (8x 2009E adjusted PER).