Analysts said the prevailing cash flow pressure is a short-term concern and the defence PSU would have to make strategic changes to its business model, as it diversifies into civilian segments, which may take time to scale up. Their price targets for the stock suggest 4-24 per cent potential upside.
Kotak Institutional Equities said the deferment of large defence prospects would increase the burden of growth on BEL’s non-defence portfolio and that the related shift in revenue mix would yield a more muted growth in Ebitda. It said the order guidance reflects the delays in orders for QRSAM (staggered purchase by the army) and MRSAM (delays faced by DRDO for army and air force versions).
For now, BEL’s order book stands at Rs 55,800 crore, which is four times its trailing 12-month revenues.
“Contrary to the management guidance, we see prospects of Ebitda margin declining over the next few years. The stable margin trajectory over the past few years masks the weakness seen in gross margin, resulting from higher share of nomination-based contracts with lower bid margin and higher share of non-defence business. In our assessment, the revenue mix will further deteriorate from here on as the above-mentioned trends continue,” Kotak said.
ICICIdirect has downgraded BEL to ‘hold’ from ‘buy’ with an unchanged target price of Rs 208, valuing the company at 20 times FY23 EPS.
“A cause of concern is the extent of cash flow pressures. We expect these pressures to moderate in the medium term with ease in defence budgetary allocation,” it said.
For growing revenues, BEL is relying on a combination of new orders largely coming in from non-defense areas (smart cities, homeland security, metros, SaaS) and from select growth in pockets of defense such as ammunition, small sub-Rs 200 crore orders reserved for domestic players and Make-II test facilities opened up for the private sector.
Edelweiss said additional growth drivers from BEL’s initiatives in healthcare, civil airport, voting machines, transportation and urban infrastructure would add to its total addressable market, but translation (return/cash flow clarity) remains key.
This brokerage is upbeat on the BEL stock with a target of Rs 250.
PhillipCapital is positive on BEL with a price target of Rs 230. It said the base business offers a strong growth runway in the medium term and non-defence activities are still an option value.
“BEL offers higher earnings visibility in the industrial sector. We retain ‘buy’ rating with a revised target price of Rs 230 Rs 215 earlier based on 20 times PE September 2023 earnings,” it said.
