Defense

08 Jun

Expect helicopter orders worth Rs 600 bn – Hindustan Aeronautics

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in the red at 16,342 (-0.5%). BHRATIARTL (-3.9%), ITC (-2.2%), and RELIANCE (-1.8%) led the losers while TATASTEEL (+1.7%), SBIN (-1.6%), and TITAN (-1.4%) led the gainers. Among the sectoral indices, REALTY (+2%), MEDIA (+1.4%), and PSU BANK (+0.7%) led the gainers, while OIL &GAS (-1.1%), FMCG (-1.0%), and CONSUMER DURABLES (-0.6%) were the only losers.

Excerpts of an interview with Mr. R Madhavan, Chairman and Managing Director at Hindustan Aeronautics (HAL) with BQ Prime on 8th June 2022: 

  • HAL anticipates revenue to increase by 6-7% in FY23. Revenue is expected to increase by double digits in FY24 and will continue to grow in FY25.
  • The company’s order book stands at Rs 820 bn, of which Rs 200 bn is for a repair and spare parts order and Rs 615 bn is for production for Light Combat Helicopters (LCH) to be delivered in 2024.
  • HAL is expecting orders worth Rs 600 bn for helicopters and basic trainers. These orders, coupled with other engine orders, will increase the company’s book-to-bill ratio from three to five times.
  • Due to the longer cycle time for the ministry’s order placing, the company must begin production or the helicopter manufacturing facilities would be underutilized. The company hopes to have a capacity of more than 90 to 100 helicopters every year. The order book is also required to be in that range so that the capacities that they have established are adequately utilized.
  • Management thinks that India should take advantage of the current geopolitical environment since countries are not favoring China and Russia for their respective source and support systems and platforms. Management sees this as an opportunity as India is capable of supporting Russia’s systems. Furthermore, Indian equipment is easier and less expensive to maintain than western competitors.
  • HAL is hoping to increase export orders as the Indian Ocean Commission area and West Asia gains traction.
  • The Tumkur facility will be inaugurated in July 2022, with an initial capacity of 30 helicopters, in addition to the present capacity of 30 helicopters. In phase 2, this capacity would be increased to 60-70 helicopters.
  • There is excess capacity for fixed-wing aircraft, with the Hindustan Turbo Trainer (HTT-40) trainer aircraft, as well as the Light Combat Aircraft (LCA) Mark-1A and LCA Mark-2, scheduled for production.
  • There hasn’t been much movement from large corporates in India’s defense industry, but the MSME sector has forayed into defense manufacturing, particularly in the avionics and accessories segment.
  • The Company anticipates some push from larger corporates, which is currently lacking, towards indigenous development of platforms and equipment.

Asset Multiplier Comments

  • Due to outstanding helicopter orders, HAL’s order book is likely to reach Rs 1,000 bn in CY22E/ FY23E, and the book-to-bill ratio is expected to rise from 3x to 5x.
  • We anticipate HAL will be able to meet its double-digit revenue growth projections starting in FY25E, as key projects like the LCA Tejas Mark-1A and LCH helicopter orders are scheduled to be completed in 2024.
  • As military threats have grown across the world, the demand for defense equipment has increased. HAL’s addressable market is likely to grow as the firm seeks to diversify its activities by increasing its foreign exposure.

Consensus Estimates: (Source: tikr website)

  • The closing price of Hindustan Aeronautics Ltd was ₹ 1,842/- as of 08-June-2022.  It traded at 15x/ 14x the consensus earnings estimate of ₹ 124.1 / 134.5/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 2,025/- implies a P/E Multiple of 15x on the FY24E EPS estimate of ₹ 134.5/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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26 May

Targeting revenues of USD 70 mn from exports – Bharat Electronics

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the green at 16,170 (+0.9%). TATASTEEL (+5%), APOLLOHOSP (+5%), and JSWSTEEL (+4.5%) led the gainers while UPL (-2%), DIVISLAB (-2%) and SUNPHARMA (-1%) led the losers. Among the sectoral indices, PSU BANK (+3%), METAL (+2.7%), and BANK (+2.2%) led the gainers, while FMCG (-0.2%) was the only loser.

Excerpts of an interview with Mrs. Anandi Ramalingam, CMD, Bharat Electronics (BEL) with CNBC-TV18 on 25th May 2022: 

  • For FY23, BEL is expected to maintain a growth of about 15% YoY. EBITDA margins are expected to be in the range of 20-22% in FY23E.
  • Raw material content stood at 59.9% in FY22 and BEL is hopeful that it would come down to 56-57% because of the indigenization efforts that have been put in place.
  • BEL has guided for a lower EBITDA Margin range even though the Gross Margins are expected to expand because most of the contracts are fixed-term contracts whose prices are fixed when they are signed. But BEL has not been able to maintain this with its suppliers.
  • Many of the suppliers, post-covid, have started demanding higher prices. BEL is trying to deliver its contracts with minimal delay. It has not been able to pass on the increased input prices to its customers so even if the material content as a percentage is expected to decline, BEL is maintaining a lower EBITDA Margin guidance.
  • BEL is confident of logging in Rs 200 bn orders in FY23. Exports declined to USD 33 mn in FY22 from USD 52 mn in FY21 mainly due to the geopolitical crisis that took place in 4QFY22. Due to the crisis, logistics and financial transactions with international customers were impacted.
  • BEL received an order book of USD 179 mn in FY22 as many marketing offices have been set up in the overseas market and have started yielding results. BEL hopes to maintain the same order pipeline in FY23.
  • Revenues from exports are expected to increase as uncertainties and logistical issues have started easing out. BEL is targeting to clock in revenues worth USD 70 mn from exports.
  • BEL will be incurring a Capex of Rs 5-6 bn coupled with Rs 13bn of additional CapEx provided it gets selected for the PLI Scheme (Production-Linked Incentive).
  • The CapEx under PLI Scheme is done as a consortium with HAL (Hindustan Aeronautics Ltd) and other private companies.

Asset Multiplier Comments

  • We think BEL is well-positioned to tap the opportunities with the government’s Make in India and Atmanirbhar Bharat initiatives.
  • Looking at the healthy order book (both domestic and exports), strong export order inflows of USD 179 mn in FY22, intending to reduce dependence on defense and diversification into non-defense segments we expect good revenue growth for the next 2-3 years.

Consensus Estimates: (Source: market screener and investing.com website)

  • The closing price of Bharat Electronics Ltd was ₹ 227/- as of 26-May-2022.  It traded at 20x/ 17x the consensus earnings estimate of ₹ 11.3 / 13.2/- for FY23E/FY24E respectively.
  • The consensus target price of ₹ 242/- implies a P/E Multiple of 18x on the FY24E EPS estimate of ₹ 13.2/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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06 Apr

Revenue growth expected to pick up in FY24-25E  – Hindustan Aeronautics

Update on the Indian Equity Market:

On Wednesday, NIFTY settled 150 points lower at 17,807 (-0.8%). HDFCBANK (-3.6%), HDFC (-3.3%), and HDFCLIFE (-2.4%) were the top losers. COALINDIA (+3.1%), NTPC (2.6%), and TATASTEEL (+1.9%) were the gainers. Among the sectors, IT (-1.6%), FINANCIAL SERVICES(-1.6%), and PRIVATE BANK (-1.3%) led the losers. PSU BANK (+2.0%), METAL (+1.4%), and OIL&GAS (+1.0%) led the gainers.

Excerpts of an interview with Mr. R Madhavan, Chairman, and Managing Director, Hindustan Aeronautics (HAL) with CNBC-TV18 on 5th April 2022:

  • The company recorded peak revenues of Rs 240,000 mn in FY22.
  • The projects currently undertaken will fructify only in FY24E and FY25E. Hence the company expects moderate growth of 6-7% for FY23E mostly through the repairs and overhauling (ROH) route. Beyond that the company expects revenue growth to be 9%, and 12% for FY24E and FY25E respectively because of new projects coming in place.
  • All the projects which include Light Combat Aircraft (LCA) Tejas, helicopters (Light Utility Helicopters (LUH) and Light Combat Helicopters (LCH)), and the Hindustan Turbo Trainer-40 (HTT-40) are indigenous. The IP (Integrity pact) for helicopters lies with the company (HAL) while the IP for LCAs lies with the DRDO.
  • The company received two new orders from the Ministry of Defense for a consideration of Rs 38,870 mn.
  •  The company is looking at various options for fundraising, as it wants to move away from the current product profile that they have. It is looking at Boeing, Civil MRO (maintenance), and Passenger to Freight conversion business. The company is also looking at partnerships for the design and development of engines for helicopters.
  • Safran Aircraft’s partnership is for the engines. The company expects to secure a financial partnership with a private player for their 10-12 tonne helicopters for the design, development, and manufacture of helicopters.
  • HAL expects the order book by the end of FY22 to be more than Rs 1,000 bn. Helicopter orders expected by the company are for 200 LUH, 140 LCH, and an order for 70 HTT-40 turbo trainers for approximately Rs. 70,000 to 80,000 mn.

Asset Multiplier Comments

  • HAL’s marquee projects, such as the LCA Tejas and LCA and LUH helicopters, are slated to play a key part in India’s transition to Atma Nirbhar Bharat for defense. The company also intends to make significant strides in the International market with LCA Tejas and their other products.
  • We believe that their order book of Rs 792,290 mn as of 3QFY22 and the expected order book visibility as stated by the company reiterates the revenue expansion story. Moreover, HAL’s focus on indigenization of components, systems, and accessories is expected to result in cost savings supporting the margins and profit.

Consensus Estimate: (Source: investing and tickr websites)

  • The closing price of HAL was ₹ 1,550/- as of 6-April-2022. It traded at 14x/ 12x the consensus earnings estimate of ₹ 109/ 126/- per share for FY23E/FY24E respectively.
  • The consensus target price of ₹ 1,824/- implies a P/E Multiple of 15x on the FY24E EPS estimate of ₹ 126/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users hshould rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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20 Dec

Airborne Electronic systems to HAL to be delivered during FY23-FY28 – Bharat Electronics

Update on the Indian Equity Market:

Following weak global market cues, Indian equities tumbled on Monday as the NIFTY 50 closed at 16,614 (-2.2%). None of the sectoral indices ended with gains. REALTY (-4.9%), PSU BANK (-4.5%), and MEDIA (-3.9%) were the worst performers of the day.

Among the NIFTY 50 components, CIPLA (+3.7%), HINDUNILVR (+1.8%), and DRREDDY (+1.0%) were the only gainers.  BPCL (-6.5%), TATAMOTORS (-5.2%), and TATASTEEL (-5.2%) led the laggards.

Excerpts of an interview with Ms. Anandi Ramalingam, CMD of Bharat Electronics Ltd (BEL) with CNBC-TV18 on 17th December 2021:

  • BEL received an order worth Rs 24bn from Hindustan Aeronautics Ltd (HAL) for the manufacture and supply of 20 types of airborne electronic systems to be fitted on the fighter aircraft, Tejas. This is the largest avionics order for BEL.
  • The order will be executed during FY23-28. The order acquisition in FY22 to date stands at Rs 100bn.
  • Margins will not be strained due to receipt of the new order. The company maintains its guidance of EBITDA margin of 22-24% for FY22 and FY23E.
  • There could be some revenue from the new order in FY22, but a majority of it will accrue from FY23.
  • Order acquisition guidance for FY22 stands at Rs 150-170 bn. There could be a change of order acquisition being higher than the guidance.
  • The non-defence business contributed ~10% to total revenues, which the company intends to increase to 20-25%. The CMD expects non-defence revenue to be 8-10% of total revenues in FY22. She is hopeful of non-defence contribution increasing to 20-25% by FY24E.
  • BEL plans to diversify into metro, rail, and airport authorities businesses. From Delhi metro, BEL has received a trial order. As soon as the trial order is completed, BEL can start booking for a larger share of the orders.
  • The newer civilian businesses require a bit of customisation, for which development work is ongoing.

Asset Multiplier Comments

  • In FY21, 79% of the total turnover was from indigenous products. 21% of the revenues were generated from products manufactured through Transfer of Technology from foreign OEMs.
  • Defence, being the mainstay of BEL, has contributed 78% of Sales revenue in FY21 as against 82% in FY20, with the balance 22% coming from the non-defence segment.
  • Non defense segments’ contribution to the total revenue has increased from 15% in FY81 to 22% in FY21.
  • The company expects an order inflow of Rs 520-650 bn for the next 3 years. Healthy order book, strong order inflows expected, diversification into non-defence segments like healthcare, metro, Electric Vehicles, and Electronic Warfare gives us the confidence of BEL achieving healthy revenue growth.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of BEL was ₹ 195/- as of 20-December-2021.  It traded at 20x/ 17x/ 15x the EPS estimates of ₹ 9.9/ 11.3/ 12.9/- for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 218/- implies a P/E Multiple of 17x on FY24 EPS estimate of ₹ 12.9/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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24 Nov

Expect to acquire orders worth Rs 150-200bn in FY22 – Bharat Electronics

Update on the Indian Equity Market:

On Wednesday, NIFTY closed in the red at 17,415 (-0.5%). Among the sectoral indices, MEDIA (+2.0%), PRIVATE BANK (+0.5%), and BANK (+0.5%) ended higher while IT (-1.5%), AUTO (-1.3%), and FMCG (-1.0%) ended lower. Among the Nifty50 components, ONGC (+4.3%), ADANIPORTS (+3.9%), and COALINDIA (+1.7%) ended higher, while EICHERMOT (-2.8%), TATACONSUM (-2.8%), and MARUTI (-2.8%) ended lower.

Bharat Electronics Ltd (BEL) received its biggest-ever export order from Airbus. Ms. Anandi Ramalingam, CMD, Bharat Electronics discussed the contours of this order and the order pipeline with CNBC TV-18 on 23rd November 2021:

  • The export order with Airbus under the C295 aircraft program of the Indian government is for the manufacture and supply of the Radar Warning Receiver and Missile Approach Warning System. The order value is USD 90mn.
  • The entire system is designed, developed, and manufactured indigenously. It is designed by DRDO and will be manufactured by BEL. It will get integrated with a countermeasure dispensing system which will get supplied by Bharat Dynamics Ltd.
  • BEL’s order book stands at Rs 560bn. The Company anticipates order acquisitions worth Rs 150-200 bn in FY22.
  • With the products being indigenously designed and developed, the margins would not be strained.
  • The company expects to receive export orders worth 25mn Euro from part of the consortium supplying Rafale aircraft to the Indian air force.
  • The major part of the radar, the transmit-receive modules (TRMs) are being manufactured by BEL. They had supplied 1,700 modules in FY21. BEL has a pipeline of 8,000 units, of which 4,000 units are likely to be supplied in the near term for 25mn Euros.
  • The Domestic order pipeline is very strong. They have orders for electronic warfare systems for the air force amounting to Rs 40bn. The electronic warfare systems for the army amount to Rs 35 bn. It is targeting naval systems orders worth Rs30 bn. They have orders for Akash Prime (Akash army) for which BDL is the lead integrator. But a lot of ground systems and radars will be supplied by BEL, worth Rs 40bn. These orders will be done in the next 6-8 months.
  • In addition, many big missile programs are in the pipeline. In the years to come, BEL should be able to acquire orders worth Rs 150-200bn yearly.

Asset Multiplier Comments

  • The Government’s Atmanirbhar Bharat plan to focus on infrastructure development indigenously has benefitted companies like Bharat Electronics. The Company got an opportunity to manufacture items that were banned from the Import List by the Government in CY20. In CY21, BEL has expressed interest in 69 items under the Make-II list. Of these 30 are under various stages of development.
  • We think a healthy order book, strong order inflows, increasing revenue from exports, and capex of Rs 18 bn over the next 3 years to meet manufacturing needs and R&D would aid long-term revenue and profit growth.

Consensus Estimate: (Source: market screener and Tikr.com websites)

  • The closing price of BEL was ₹ 207/- as of 24-November-2021.  It traded at 21x/ 18x/ 16x the consensus earnings estimate of ₹ 10/ 11.4/ 12.9 for FY22E/23E/24E respectively.
  • The consensus price target is ₹ 242/- which implies a PE multiple of 19x the earnings estimate for FY24E of ₹ 12.9/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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