Why is BEL hitting new highs in a lacklustre market?

It is not often that you get to see a PSU stock outperforming the index in the midst of lacklustre markets. It is not like BEL is having a great time in terms of business risks. For instance, the chip shortage is still a major problem and could be a key headwind for Bharat Electronics in executing its orders. Another major business risk for BEL is the lower-than-expected increase in defence capital budget. The revenues and the order book of BEL is largely dependent on the capital expenditure plans of the government in defence.

But the stock of Bharat Electronics appears to be singing a different tune altogether as it soared 6.2% on Monday to scale a fresh 52-week high of Rs261 on the National Stock Exchange. One reason was that the order book position at 3.3 times the annual sales is one of the best that BEL has ever enjoyed. In addition, what also worked for the company is that the its June quarter (Q1FY23) performance was much better than the wildly optimistic expectations. Clearly, impressed investors are giving a thumbs up to the stock.

Let us take a quick peak at the numbers of BEL for the Q1FY23 quarter. Standalone revenues were up by a whopping 90.4% yoy at Rs3,113 crore although one can argue that this was helped to a large extent by the low base of last year. In Q1FY22, the operations of BEL had been badly hit because of the second wave of the coronavirus pandemic. But, even if we leave aside the low base story for some time, the fact remains that the order book and its pace of execution of orders have been absolutely compelling and value accretive.

Let us also look at the profit numbers of BEL for Q1FY23. Gross margins improved marginally by 10 basis points to 41.9% in Q1FY23. However, the EBITDA (earnings before interest, tax, depreciation and amortization) margins expanded by an incredible 1260 basis points to 16.5% on a year on year basis. However, what would probably rile the investors is that the sequential EBITDA margins fell by nearly 830 basis points and that was largely an outcome of negative operating leverage, which has taken its toll on the performance.

Let us not forget the impressive order book of BEL at Rs55,333 crore as of the end of June 2022. Now, the order book to sales ratio is close to 3.3 times, which is a classic indication that there are really no hassles in the growth of top line for BEL. Also, the underlying trend is of an increase in defence spending resulting in a sharply improve pipeline of orders. BEL would most likely garner orders worth Rs110,000 crore over the next five years as per a report put out by a leading brokerage house. Clearly, the momentum appears favourable.