Nahar's Biopsy on BHARAT ELECTRONICS LIMITED.

MULTIBAGGER 15 POINTER FORMULA SCORE = 10(Good Investment opportunity)😊

(But wait till Q1 results and management commentary)

(Score of 12 and above means a possible multibagger (great investment opportunity), 
Score of 10 & 11 (good investment opportunity)
Score of 8 & 9  (Should not be a part of portfolio unless firm company specific outcome expected)
Score below 8 is Avoid Risk is too high.)


Important to note here that in August 2018 margins for Ministry of defense led projects have been reduced to 7.5% from 12.5% will cause a dent in its PAT margin and thus would affect future EPS considerably.For the current year it enjoyed higher margins ,So when margin was 12.5% PAT margin was 17.68%,13.55% & 15.95% for 2017, 2018& 2019, so for future years  it should be expected to range around 8 to 11%.However for the year 2020 or 2021 change may not be clearly evident due to execution of backlog of orders.So till Q1 results and mangement commentry on how are they going to cope up wih the scenario it is a wait.


ABOUT THE COMPANY:
Bharat Electronics Limited(BEL) is an Indian state owned aerospace and defense company having 9 manufacturing units.Company holds the "NAVRATNA" status, offering wide variety of products for the defense of our country covering products like Long range surface to air missile, Naval equipment's, AMC for Radars, Weapon and Gun upgraded, Smart city business etc. Defense accounted for 83% of source of revenue while 17% was for Non defense for 2018-19.

SHAREHOLDING PATTERN:😋
As on 31st March 2017 Government owned 68.19% , followed by Mutual Funds 12.09% and FII holding 6.65%.Shareholding pattern as on 30th June 2019 was Government 58.83%, followed by Mutual Funds holding 17.43% and FII holding rose to 8.91%.Thus Mutual Funds and FII's have gradually increased their share. However scenario after Budget will be interesting to be seen as surcharge on ultra rich has been increased.Also if SEBI follows the government proposal of promoter holding ceiling up-to 65%, BEL will not have overhung pressure of sell by promoters as already holding is at 58.83%.

ORDER BOOK:😇

Order's as on 31st March	2016	2017	2018
Amount(Cr)                  A	32022	40242	40115
Revenue for the year	2017	2018	2019
Amount(Cr)                  B	8612	10323	12084
B/A	26.9%	25.7%	30.1%

Conversation ratio of  Order's Pending to be executed at the end of Previous year into Revenue for the Current year is healthy and increased from 2016 to 2018. For 2018-19 it rose to 30.1% thanks to quick execution of Voting Machine and VVPAT(Voter Verifiable Paper Audit trail) order which was of 2600cr. For the year 2019-20 order book has touched its all time high of 51798cr, so even if taken lowest conversation ratio of the last 3 years i.e. 25.7% i am looking for Revenue of  13287 cr amounting 10% YoY growth in top line.

Order Book bifurcation for 51798cr is 83% (49% is from Indian Navy)defense and 17% non defense thus gradually diversifying its order book.

In Modi 1.0 term (14-15 to 18-19) order book rose from just 21617 to 51798cr i.e. a rise of 2.4 times clearly a beneficiary of Make In India so Modi 2.0 can be reasonably expected to reflect the same trend.

Table below shows the Defense capital expenditure by India(A=Actual)(E =Estimated) and Share allocated to BEL.(Source: GOI)

Year	16-17A	17-18E	18-19E	19-20E
Defense Capital Expendiure Budget(cr)	86357	86488	93982	108248
Revenue for BEL	8612	10323	12084	13065.
% of Share of BEL	10%	12%	13%	12%

Hence of the total amount being expend for capital expenditure in Defense, BEL's share has been increasing YoY and for the Year 19-20E recently honorable FM allocated 108248cr of amount for Defense capital expenditure and even if assumed  share for BEL as on weighted average basis we are eyeing at Revenue of 13065cr i.e growth in topline by  8.11%.

REVENUE:😊
Revenue has grown with a healthy CAGR of 14.37% in Modi 1.0 term.Revenue growth was 11% for 2017-18 which got increased to 17.8% for 2018-19, thanks to Voting machine and VVPAT order in 2018-19 for 17.8% growth. Voting machine and VVPAT accounted for 22% of total revenue for 2018-19, however the healthy order book we talked about of 51798cr of which 45% of orders was acquired new while remaining i.e. 55% are past orders waiting to be executed hence the vacuum created by voting machine and VVPAT order should be reasonably expected to be comfortably filled.

Let me reiterate exact words of  honorable FM.
"Basic custom duty has been exempted for import of defense equipment's that are NOT MANUFACTURED IN INDIA".

And let me reiterate exact words in latest press release of BEL.
"96% of sales revenue accrued is from indigenous technology".
Combining both of the two makes one thing clear that BEL would not be affected to a extent that it raises a cause of concern.

INVENTORY:😇
Inventory accounted for 28.6% of Total assets in 2017 which got reduced to 25.83% in 2018 and further reduced to 21.4% in 2019 while turnover for 2017 grew at 19.86% and for 2019 it grew by 17.8% thus implying reduced conversation time from inventory to Revenue which is also evident by reduced inventory days from 192 days in 2017 to 139 days in 2019.

94.11% of Total Inventory was Raw material+WIP for 2017 and 92.6% for 2019 which is justified as the companies business which is mainly driven by its Order book and hence does not face the issue of high amount of finished goods lying in Inventory unsold. As majority of the orders take multiyear to be executed thus justifying significant percentage share of Raw material and WIP every year.

DEEP DIVING:😍

• COMC as % of revenue reduced from 55% in 2017 to 44% in 2019 combined with decreased employee expenses from 18% to 16% during the same time and thus we see EBIT margin rising from 16.89% to 22.47% during the same time or PAT margin improved from 13.45% in 2018 to 15.73% in 2019. However what's needed to be highlighted that during the same time provision for doubtful debts,obsolete which was as high as 3.5% of total revenue for 2017 which rose to 3.8% in 2018. Other expense accounted for 10% of total expenses for 2017 which rose to 12% for 2019 while around 38% of other expense in 2017&2018 accounts for provision highlighted before,if 38% is used for 2019 other expenses as well provision will peak at 4.3% of total revenue.

• Bad debts written off for 2017 was 3.52% which rose to as high as 7.67% in 2018 of total debtors combined with provisions talked in previous point requires much needed clarification from management about what kind of debtors proved bad debts and the reasons of continues increase in provision.(Annual report for 2019 has not been released yet to find exact amount of Bad bets written off and provision created).

• Although production got increased yet power and fuel cost in other expense from 2016 got reduced from 40.12cr to 31.30cr in 2018 due to wind energy generated by BEL itself which netted off.

• Both R&D expenses as well as conversation of R&D expense into asset have been increasing. R&D expenses got increased from 649.15cr in 2016 to 938.5cr in 2018 while Intangible asset under development got increase from 32%of R&D expenses to 46.59% in 2018 while Intangible asset under development for 2019 was 446.29cr. Thus it shows both BEL's proactiveness in realizing importance of R&D as well as efficiency in use of every money expend for R&D.

•  Debtor days has been 171 days in 2017 to 167 days in 2019 , Inventory days reduced from 193 days to 138 days & Creditor days reduced marginally from 107 days to 98 days during the same time. CCC is reduced from 257 days to 206 days during the same time which seems very high but commensurate with kind of business and the reasons for the same are higher inventory due to multiyear projects and major buyer is Government.

• Company had a negative CFO in year 2017 & 2018.For 2018 CFO was negative due to rise in accrued income which forms part of other financial asset from 207.92cr to 1344.52cr and increased amount of advance to creditors and balance deposited with customs and port trust.However for 2019 CFO comes to around 1300cr.

• If CCC is as high as more than 200 days and company also spend for capex but still company don't resort to loan, one of the most important reason is Advances received from customers(part of other current liabilities) amounted to 6083.12cr in 2017 while total cash expenses for the same year amounted to around 6847 cr .For 2018 total cash expenses amounted to 8320cr while Advances received were 7045.01cr. For the year ending 2019 other Advance received from customers was around 7494cr and its part of current liabilities thus that will surely be reflected in top line for 2020.

• Of the Total assets only 6.60% was PPE+CWIP as at the end of 2016 which rose to 11.4% at the end 2019 while inventory balance as % of total assets was just double.Thus gives an idea that company do not need very heavy capex for generating revenue which is further evident from seeing revenue and cost per employee p.a. which was 0.78cr and 0.127cr in 2016 while 1.06cr and 0.182cr in 2018. Higher cost per employee shows the high skillful employee being employed and the business of the company requires that too. Needless to point out here is although low capex is needed but company hold NAVRATNA status thus low competition is reasonable conclusion.

• Average life available for PPE comes roughly around 7 years thus no significant capex is for maintenance due.

• Company is virtually debt free and if Advance from customers is removed from other current liabilities NCAV is Rs 48 per share as on 31st March 2019.While CMP is 106 meaning BEL is currently trading at 2.21 times of NCAV which seems attractive.

•  Equity dividend rate was as high as 170% in 2016 which got increased to 340% in 2019(FV=Rs1).Thus healthy and increasing dividend seems attractive for investors.

• Return on Equity has improved from 18.77% in 2017 to 22.98% in 2019 thanks to improved equity multiplier and asset turnover ratio implying better conversation of equity to assets and assets to revenue.

VALUATION:😉😇

Particular/year	2017	2018	2019
EV/EBITDA	13.3	15.5	7.1
PE	20.6	24.7	11.6
PB	4.3	4.6	2.5
PS	3.7	3.4	1.9

DCF valuation would distort the picture as high volatility in cash flows is seen.

A Healthy order book with improving margin and attractive valuation with needed clarification on provision and bad debts coupled with likely beneficiary of Modi 2.0 Make in India.Thus a good investment opportunity for long term.

DISCLAIMER:Research has been done purely out of authors passion for equity research with the information available at public domain not representing any view of any organisation in any way. Analyst is not responsible for any losses and every investor is advised to invest only after careful research of his/her own or seek professional help for the same.