Fundamental Analysis of Bharat Electronics – Trade Brains

Fundamental Analysis of Bharat Electronics: As an investor what do you prefer while investing in a company? Low debt, revenue growth, dividends, or R&D investments? Or is it everything? Well, there’s one stock that is a complete package. And guess what? It comes with the backing of the Government of India. We are talking about Bharat Electronics Ltd. (BEL).

In this article, we’ll perform a fundamental analysis of Bharat Electronics, and see if it is a holistic company from an investment perspective.

Fundamental Analysis of Bharat Electronics

We shall start off our analysis with an overview of the business and products of the company followed by a brief description of its revenue segments. Later, we race through the financials of the stock. A highlight of the future plans and a summary conclude the article at the end.

Company Overview

Incorporated 7 decades ago in 1953, Bharat Electronics Ltd. (BEL) is a Navratna status Public Sector Undertaking involved in the design, development, manufacturing, and supply of a broad range of strategic electronic products and systems.

It comes under the Ministry of Defence (MoD), and the Government of India (GoI), and has been a key provider of products and services to the Indian Defence Forces. In recent years, the company has also expanded into non-defense offerings. 

BEL makes various systems including those for radar & fire control, weapons, network-centric (C4I), electronic warfare, and anti-submarine warfare systems & sonars as part of its defense portfolio.

As part of its non-defense offerings, the PSU has capabilities in the areas of electronic voting machines, healthcare, civil aviation, solar energy, EV charging, and more. 

As of 31 March 2022, the company employed 8,853 people. It has 9 manufacturing units and 12 R&D centers located across key Indian cities such as Bengaluru, Pune, Chennai, Hyderabad, Navi Mumbai, and more. 

Let us now learn about the revenue segments of Bharat Electronics in the next section.

Revenue Segments

During FY22, the company earned a majority of 89.76% of its revenue from defense products and services. The non-defense segment accounted for a small 10.24% of the total income.

As for the segregation of turnover by source, domestic sales of products brought in 88.76% of the income. The sale of services and exports brought 9.67% and 1.57% of the total income. 

Even though non-defense sectors such as homeland security, smart city, energy storage products, solar, space electronics, railways & metro solutions, etc form part of BEL’s income, their contribution is small. 

This makes BEL a defense stock with the defense sector being its primary source of income. We acquaint ourselves with the defense industry landscape in the next section of our fundamental analysis of Bharat Electronics.

Industry Overview

In its Union Budget 2023-24, the Centre allocated Rs. 5.94 lakh crore, 13% more than Rs 5.25 lakh in 2022-23 crore for the defense needs of the company. This covers the compensation of personnel, modernization of armed forces, manufacturing units, maintenance expenses, and research & development institutions. 

But it is not only that India’s defense expenditure is rising. On an interesting note, the share of the total capital defense allocation in defense expenditure has grown over the years. For instance, this capital expense which is aimed toward the modernization and development of infrastructure has increased by 57% since  2019-20 to Rs 1.62 crore in 2023-24.

Thus, going forward the growth of the defense sector in India will be led by:

1. higher defense spending, 
2. the rising share of capital outlay as a percentage of total military spending and
3. Make-in-India-led self-reliance in defense systems and products.

Bharat Electronics – Financials

Revenue & Net Profit Growth

We’ll now move on to the financials of the company as part of our fundamental analysis of Bharat Electronics. The operating revenues have grown at a CAGR of 8.89% from Rs 9,221 crore in FY17 to Rs 15,368 crore in FY22. During the same period, its net profit expanded at an annualized rate of 7.87% to Rs 15,368 crore.

The table below presents the operating revenue and net profit of Bharat Electronics for the last six years.

Fiscal Year	Operating Revenue	Net Profit
2022	15,368	2,400
2021	14,109	2,100
2020	12,968	1,825
2019	12,164	1,887
2018	10,485	1,431
2017	9,221	1,523
6-Yr CAGR	8.89%	7.87%

Operating & Net Profit Margins

As for the profit margins of the company, they have largely remained stable over the years. In FY22, the operating profit margin and net profit margin of the company stood at 20.63% and 15.32% respectively. 

The table below highlights the profit margins of the company for the last five years.

Fiscal Year	OPM	NPM
2022	20.63	15.32
2021	20.89	14.66
2020	19.13	13.82
2019	21.71	15.19
2018	18.83	13.53

Return Ratios: RoE & RoCE

Bharat Electronics is an efficient business with impressive return ratios upwards of 27.2% for RoCE and 20.2% for RoE. The difference in return ratios points to the absence of the debt component in the capital mix of the company. 

The figures below tell us the return ratios of Bharat Electronics for the previous five fiscals.

Fiscal Year	RoCE	RoE
2022	27.2	20.2
2021	27.9	19.6
2020	25.7	18.6
2019	30.5	21.5
2018	24.7	17.9

Debt / Equity & Interest Coverage

Moving on to the leverage analysis of the stock, with nil debt, the PSU is a debt-free stock. Furthermore, it has maintained its low-debt status for many years.

Fiscal Year	Debt / Equity	Interest Coverage
2022	0.0	707.41
2021	0.0	462.82
2020	0.0	689.44
2019	0.0	207.14
2018	0.0	894.62

Future Plans Of Bharat Electronics

So far we looked at previous fiscals’ data for our Bharat Electronics fundamental analysis. In this section on the future plans, we’ll try to get some understanding of what lies ahead for the company and its investors. 

1. During the fiscal year, the defense CPSU spent Rs 565 crore or almost 1/4th of its yearly profits towards capital expenditure. The amount was deployed towards creating facilities, upgradation of test equipment, modernization of facilities, research, and development, and more.
2. The order book provides revenue visibility to companies like Bharat Electronics. In the last year, it received a large Rs 2,400 crore order from Hindustan Aeronautics for electronic systems for the Tejas Aircraft. In addition to this, it also bagged orders from Airbus and Indian Airforce for $ 93.15 million and Rs 3,102 crore respectively.

Bharat Electronics – Key Metrics

We are almost at the end of our fundamental analysis of Bharat Electronics. Let us take a quick look at the key metrics of the stock.

CMP	₹94	Market Cap (Cr.)	₹68,500
EPS	₹3.8	Stock P/E	24.9
RoCE	27.2%	RoE	20.2%
Promoter Holding	51.1%	Book Value	₹18
Debt to Equity	0.00	Price to Book Value	5.28
Net Profit Margin	15.32%	Operating Profit Margin	20.63%

In Conclusion

For the past five years, the average dividend payout of Bharat Electronics has been over 41%. This coupled with revenue growth of 9% (CAGR), R&D investments, and capital expenditure makes it a well-balanced stock. Going forward, more contract awards will be a key trigger for the stock as the national government intensifies its focus on indigenous defense technologies.

In your opinion, can the revenues of Bharat Electronics rise faster than they did in the past? What can be unseen risks for stock investors? How about you let us know your views on the stock in the comments below?

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